Monday, October 11, 2010

Ilargi: Please don’t forget to order Stoneleigh's video presentation of "A Century of Challenges", the lecture that's made her famous across Europe and North America, like this weekend at the ASPO-USA conference in the nation's capital. There is a reason some people have driven hundreds of miles to see her live. It’s up to you to find out why.

to order (or click the button on the right hand side just below the banner), and why not buy a copy for someone you think needs to know what Stoneleigh has to say. Or just donate some extra cash in the top left hand column just below the banner. Stoneleigh deserves all the financial support she can get.

Ilargi: See, this always happens: I was carefully leading up to this big “you're all zombies" theme over the past week, a theme that I felt needs some space and introduction (see An 800-Pound Gorilla On A Serious Diet and Wile E.'s Suspended Reality) and then I read someone over the weekend who has thought of the same thing, in this case Brett Arends at the Wall Street Journal:

Japan struggled for 20 years with "zombie banks"—so called because their debts, if properly recognized, made them insolvent. Here in America, we have millions of zombie homeowners. Why is this any better?

Ilargi: Hey, but it's alright by me, this notion will soon go viral anyway, and the fact that it will dawn on people is far more important than that I thought of it. And besides, I like saying "All your neighbors are zombies" better than "You're all zombies" to begin with.

Still, to Mr. Arends, I would say: It's not like Japan has one and the US has the other: America has both zombie banks AND zombie homeowners. Plus a lot of zombie unemployed, Wal-Mart greeters and burgerflippers, and I’m not all that sure it doesn't have a zombie government too.

What drives the US economy today is zombie money. One part is the keystrokes that make up TARP, stimulus and quantitative easing, the other is the funny accounting that allows the gamblers to pretend they didn't lose their wagers.

When the banks go belly-up so does the real economy. Then again, the only way to prevent a banking collapse is to actively make the real economy collapse. And even that prevention can only be just temporary. What underlies it all is the underlying value of swaps, (mortgage-backed) securities and other derivatives on and off balance sheets which Wall Street successfully lobbied the government into "legally ignoring" that very underlying value for.

But the resulting "funny" mark-to-fantasy accounting was never meant to last forever, and for good reason: it can't and it won't. As Janet Tavakoli puts it, talking about the ongoing Foreclosure Gate quagmire:

When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed.

But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.

Ilargi: I remember this banker recently, forget the name and context, who said that assets shouldn't be marked to market that were not meant to be sold anyway. Well, they should, really: someone who purchases a share in a bank or other financial institution has a pretty iron-clad right to know the true value of its assets, not just the one that looks more attractive.

The most positive spin we can put on it is that nothing has changed, nothing has been solved, in the past 2-3 years. And that's not all: as Ms. Tavakoli points out, problems like these don't go to sleep, they get worse if you don't solve them. And that’s why we find ourselves where we are today. It's also why I leave open the possibility that the US has a zombie government. Janet Tavakoli again:

This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back.

But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.

Ilargi: It was all fraud all the time and all the way. From stated income $500,000 loans for McDonald's employee on the week to banks writing MBS securities on those loans, to the ratings agencies stamping them sight unseen with their AAA label, to the robo-clowns who until last week were signing foreclosures on these same loans at a rate of 8000 a month. So how many people involved in this have been arrested? Thought you'd never ask.

Perhaps it's all best explained by this brilliant video that Tyler Durden dug up, which you really need to see:

Will the High Frequency Signing scandal be the proverbial straw on the camel's back? Perhaps. In the meantime, here is a soon to be viral, and all too real, parody of foreclosure gate. At this point the guilty parties are irrelevant. All that matters is that America's terminal collapse into a banana republic status is now obvious for all to see.

And as for Cramer saying foreclosure gate will only force home prices to go higher, pray tell dear Jim, just which buyers will put their own money into a home when they have no idea at what time the real title holder shows up with a restraining and eviction order, and demands immediate access.

Of course, there is a loophole: the Fed will simply henceforth pay for all home purchases. And should the government drop mortgage rates to zero, and subsidize tax and insurance payments into infinity, that may well happen. Of course, it will also bankrupt the country, but since when was America's insolvency news to anyone...

Ilargi: However, all those who think (and I talked about this before) that now the banks will have their comeuppance, and be exposed to all for who they truly are, you haven't been paying attention.

The present US administration has been shoveling trillions of dollars of your money into both the banking system and the housing market. And the White House is not about to give up on that investment.

What they want you to see is the marked to make believe claim that TARP cost you almost nothing. What has been going on behind the scenes is a whole different ballgame. The interplay between zero interest rates, 3-4% Treasury rates and the Fed paying interest on reserves constitutes a de facto limitless continuation of bank stimulus. Think Obama will risk the same very banks he's worked so hard to save over a trivial matter like illegal foreclosures? Get with the program.

And I haven't even as much as mentioned Fannie Mae and Freddie Mac, the proud owners (in your trust) of trillions of dollars worth of these debased, greatly diminished-in-value and lawless loans. Washington can't do anything that would risk the position of Fannie and Freddie. Which exist only by the grace of another accounting trick: keeping them off the federal balance sheet, even if they're 80% state-owned. Washington will squash this thing with all it has (unless one of the two parties sees political gain in promoting it).

But don’t take my word for it, here's the government's Fannie and Freddie overseer:

[..] several people familiar with the matter have said banks are facing growing pressure from Fannie Mae and Freddie Mac to address deficiencies in their mortgage servicing operations. Fannie Mae and Freddie Mac [..] were taken over by the government in 2008 and have been run under a conservatorship by the Federal Housing Finance Agency since that time.

FHFA acting director Edward DeMarco [..] said his agency was working with Fannie Mae and Freddie Mac to determine the scope of the documentation issue and come up with targeted ways to address the matter. Banks and regulators are facing growing political pressure to act quickly, with multiple politicians and state attorneys general insisting in recent days on a broad freeze of foreclosures until the matter is resolved.

"I understand there's a lot of concern," Mr. DeMarco said. "Concern is understandable. We're not diminishing the concern. We are trying to be quick but measured in the approach and the response taken. We're concerned about the whole housing market and we're concerned about what this means for taxpayers and other market participants." He said he didn't want to "rush into things that create further unintended consequences."

Mr. DeMarco said he hasn't seen any evidence that people had lost their homes to foreclosure during this process who had otherwise made their monthly payments or had made "full attempts to satisfy and meet the terms of some foreclosure-alternative program." "I don't think that's what we're looking at here, from what we know to date," he said.

Ilargi: See? It’s like the banks were a little sloppy, perhaps, but in the end, really, the blame is put squarely with the borrower. The White House washes its hands and clears its tracks even as the entire affair has yet to come to fruition. That's not a coincidence. They want no part of this.

They want no enduring legal battles or Heaven forbid a traumatic pause in the entire housing system. Once that would start, there's no telling where it would end. If a hundred different judges look at the contracts and the way they were handled, there’ll always be a few who actually check the legality of the various practices in their law books. And that could lead to nightmarish scenarios for the administration and Congress. The biggest fear of all is a full stop to lenders' revenue flow.

David Axelrod did the first Sunday talking head nothing-to-see-here damage control:

[Top White House adviser David Axelrod]: "I'm not sure about a national moratorium because there are in fact valid foreclosures that probably should go forward" "Our hope is this moves rapidly and that this gets unwound very, very quickly,"

Ilargi: Oh boy, do they ever want it over quickly. The other guys too, and they're less subtle about it:

The No. 2 House Republican, Rep. Eric Cantor of Virginia, said a national moratorium would remove the protections that lenders need. "You're going to shut down the housing industry" with a national stoppage, Cantor said. "People have to take responsibility for themselves."

Ilargi: At times you see people say things that, no matter how deranged your mind has gotten from listening to them, you could never have made up yourself. "People have to take responsibility for themselves." Eh, does that go for bankers too? And this one if poetic in its, let’s say, "blind courage": [..] a national moratorium would remove the protections that lenders need. Where does that come from, who thinks of such lines and then expresses them in public, other then some guy who holds up his hand when K-Street comes calling?

But yeah, kudos for creative bluntness. You have an industry that you already know blew up your entire economy one way, then you find out they're completely messing up on the other end as well, and your line is about "the protections the lenders need and borrowers need to be responsible?" Whoa!

After that moment of still admiration for sheer audacity, let's return to the zombies. That is to say, your neighbors. Not you, of course, you’ll be just dandy. As I said, what drives the US economy today is zombie money. The financial system lost so many bad wagers just in the new millennium, they're easily sufficient to bring down the whole country. And instead of at least trying to deal with it, Washington had decided to go for the "Watch the hand" to make people think the losses have magically vanished.

And yes, granted, it has been quite a success. Gullibility has been known to drive entire political careers from A to Z. But in times of trouble, it's not all that straightforward.

I think we can agree that the banks are zombies, that they would have been dead a while ago if not for your taxpayer money. The problem embedded in that notion is that the debts from lost bets are much higher than your taxpayer funds could ever dream of paying off. And since a very substantial part of those bets were wagered using the primary average taxpayer asset, his home, as -hidden- collateral, the country as a whole reaches upon a fork in the road.

The banking system is on life support. Can we agree on that? And the nation as a whole sees its credit life-blood contracting like a roof on fire, and therefore depends on the banking system to extinguish the flames. But the banking system is on life support! It won't and can't have a positive contribution to the economy for a long time to come. And still the nation's trillions are flowing into providing that life support, in the alleged hope that it will revive the economy.

There's something hugely false in that whole picture. It’s just not going to happen. The trillions of your money that went to the banks could instead have gone to you. Too late now! Pull the plug from the banks' drip, pull it from Fannie and Freddie, and you can call the undertaker in 10 minutes. I don't want to upset you, but many of us have seen people on life support who didn't pull through and come back: it only served to extend their lives, and often unfortunately their agony. Whether that's a good idea depends on the price that's paid.

Wall Street banks are beyond salvation. And if you let your government continue to do what it's done so far over the past 2-3 years, so is the entire US economy. What resources could be used to help the living, have instead been used to prolong the death rattle of the zombie banks. And they will not go quiet into that night. They’ll drag most of what's left of the country down with them.

Home prices are stuck at temporary artificial sugar highs. Or maybe it's crack. In order to raise home prices, you need 1) a healthy financial system, 2) a solid drop in unemployment, and 3) a way for the average American who still has a job to clear their debt and start spending again.

None of these 3 things will happen anytime soon. Everything in the economic system is still pulled down by debt, and there's no way to get rid of it, other than QE, stimulus and funny accounting. Which don’t work for banks beyond a certain expiration date, and which don’t work at all for the American citizen.

And that means that home prices will and must keep falling, that unemployment must keep rising, that governments at all levels will raise taxes on an ever more impoverished population. If you think today that your job is safe, please think again. Consider a scenario worse than you have so far. If you think you’ll be able to sell your home at a price that's favorable to you: in 95% of cases, you won't. Think about what that means for your future.

The government can keep the zombie banks alive for a bit longer, but not that much. At some point, the morphine kills the host. It can't keep you alive either, provided it would want to, not if you depend on a job that can be scratched, a pension that can be diluted, or a property that can be confiscated.

And I know, the vast majority of you may perhaps recognize some of the features, but not when it comes to their positions in life. So look at your neighbors: how safe are their jobs, the value of their homes?

You see, unemployment leads to foreclosures which lead to unemployment which leads to lower home prices which lead to fewer jobs which lead to sagging retail sales which lead to fewer jobs which lead to lower home prices which lead to bankrupt businesses which lead to fewer jobs which inevitably in the end lead to broke pension funds, collapsing stock markets, bankruptcies in the financial system, even more unemployment, even lower real estate prices and down the line to a seizure in the whole system. The last great idea is the bring down the value of the dollar, but that, as any child can see, is not that great of an idea for a nation that imports much more than it exports.

So the banks are zombies, homeowners will be zombies when prices keep on falling as they must, people losing their jobs are zombies, and their numbers will be great, and as I said, all your neighbors are zombies too because of it all. Good thing you're doing so fine, you lucky one. Now try to keep the neighbors away.

To conclude, here's what the UK is facing, just so can can get a picture of what your neighbors will be facing as a first step down the ladder:

Significant belt-tightening beckons as rises in tax and National Insurance and cutbacks in benefit payments begin to take effect. Middle-income families will be £4,000 a year worse off by 2013 in light of the decision to scrap child benefit for higher-rate taxpayers. Calculations for The Sunday Telegraph show that a family earning £50,000 could be £4,000 a year worse off after all of the Coalition's tax and benefit changes are implemented, while the cost of living is also predicted to rise.

Ilargi: Sure, over $75,000 seems like a lot of money. But, looking at typical spending patterns, let’s say 35% of it goes toward income tax, another 35% towards the mortgage, and 20% to other fixed costs, electricity etc, which means there's just $7500 left for discretionary spending, and $6400 of that is about to be taken away.

And that means your neighbors have zombie children too. Better start locking the back door at night.

Most market participants are fixated with the potential for QE2 to boost asset prices and generate organic economic growth, however, without a subsequent rise in aggregate demand and productivity the program will ultimately be deemed a failure as prices readjust over time to reflect the real underlying fundamentals. Mr. Bernanke is making the same blunder that we made with the past bubbles busts – if we can create paper profits and convince consumers that they should spend those paper profits then we’ll be on our way to economic prosperity. The problems arise when asset prices readjust lower to meet their true fundamentals. It’s ponzi finance and nothing more.

As I have previously explained, the goal of QE is to increase aggregate demand by creating a fictitious wealth effect and by increasing bank loans. The market appears to think that QE1 was some sort of success, but as I have argued, QE1 was only successful because it altered bank balance sheets and alleviated the credit strains. After all, this was Ben Bernanke’s goal at the time – to alleviate the credit pressures. What QE1 did not do (and what we need now) is increase lending supported by a boost in real aggregate demand. QE does not add net new financial assets to the private sector and is not inherently inflationary though Mr. Bernanke appears to be convinced otherwise. Unfortunately, QE1 failed to succeed in contributing substantially to the economic recovery as Northern Trust recently showed:

“When the Fed embarks on QE2, all else the same, Federal Reserve Bank credit will increase. What transpires with respect to commercial bank credit will determine the effectiveness of QE2 in increasing aggregate demand for U.S. goods and services. The more commercial bank credit increases in tandem with Federal Reserve Bank credit, the more effective will be QE2 in creating aggregate demand. If, however, commercial bank credit should decrease by the same or greater amount of the increase in Federal Reserve Bank credit, then QE2 will be a failure in creating additional aggregate demand. This is what happened when QE1 “set sail.” Chart 3 shows the behavior of the sum of Federal Reserve and commercial bank credit. The shaded area in Chart 3 represents the period in which QE1 was in effect. As can be seen in Chart 3, during the “voyage” of QE1, the sum of Federal Reserve and commercial bank credit trended lower. Chart 4 shows how this came about (no sailing pun intended). A small increase in Federal Reserve Bank credit in the 16 months ended March 2010 was offset by larger decrease in commercial bank credit during the same period.”

QE1 failed to boost bank lending and aggregate demand. Therefore, why would anyone assume that this time will be different? I think the market is pricing in an economic outcome that will fail to materialize.

The top regulator for Fannie Mae and Freddie Mac said Friday that government officials aimed to develop a tailored response to the recent foreclosure-documentation controversy that wouldn't have an adverse impact on the fragile housing market. The comments came the same day Bank of America Corp. said it was temporarily going to freeze foreclosure sales across the country as it reviewed the process used by mortgage servicers to handle foreclosures. Several other lenders had agreed to halt foreclosure sales in certain states, but Bank of America's announcement was the most sweeping.

It is unclear if other large mortgage servicers will follow suit, but several people familiar with the matter have said banks are facing growing pressure from Fannie Mae and Freddie Mac to address deficiencies in their mortgage servicing operations. Fannie Mae and Freddie Mac were created by Congress to provide liquidity and stability to the housing market. The companies were taken over by the government in 2008 and have been run under a conservatorship by the Federal Housing Finance Agency since that time.

FHFA acting director Edward DeMarco wouldn't comment specifically on the Bank of America decision. But he said his agency was working with Fannie Mae and Freddie Mac to determine the scope of the documentation issue and come up with targeted ways to address the matter. Banks and regulators are facing growing political pressure to act quickly, with multiple politicians and state attorneys general insisting in recent days on a broad freeze of foreclosures until the matter is resolved.

"I understand there's a lot of concern," Mr. DeMarco said. "Concern is understandable. We're not diminishing the concern. We are trying to be quick but measured in the approach and the response taken. We're concerned about the whole housing market and we're concerned about what this means for taxpayers and other market participants." He said he didn't want to "rush into things that create further unintended consequences."

Mr. DeMarco said he hasn't seen any evidence that people had lost their homes to foreclosure during this process who had otherwise made their monthly payments or had made "full attempts to satisfy and meet the terms of some foreclosure-alternative program." "I don't think that's what we're looking at here, from what we know to date," he said.

Fannie Mae and Freddie Mac carry enormous influence over the housing market. They buy mortgages from banks and other originators, so banks are often dependent on these companies for liquidity to originate loans. Fannie Mae and Freddie Mac enter into servicing agreements with scores of companies to collect payments and work with homeowners, and its these contracts that are central to the companies' involvement in the current issue.

"From where I sit, I'm concerned the country's housing finance system remains fragile, and it's my intention to work through this subject in a manner that is fair to households with delinquent mortgages but is also fair to servicers, to mortgage investors, and most of all is in the best interest of the taxpayers and the housing market," he said.

The White House is working on a plan to overhaul the housing finance system, and Congress is expected to tackle the issue early next year. Democrats and Republicans have said Fannie Mae and Freddie Mac shouldn't be allowed to continue operating in their current form, but there are competing proposals for how to restructure the system. The government has spent billions of dollars in the last two year to keep Fannie Mae and Freddie Mac operational.

Consumer advocates and lawyers warned federal officials in recent years that the U.S. foreclosure system was designed to seize people's homes as fast as possible, often without regard to the rights of homeowners.

In recent days, amid reports that major lenders have used improper procedures and fraudulent paperwork to seize properties, some Obama administration officials have acknowledged they had been aware of flaws in how the mortgage industry pursues foreclosures. But the officials said they could take only limited action to address the danger. In part, this was because they wanted lenders' help carrying out federal programs to modify mortgages that had fallen into default or were poised to do so.

New concerns about improper practices - such as those involving faked documents or "robo-signers" who signed tens of thousands of documents without reviewing them - have prompted the mortgage servicing arms of the country's largest banks to freeze millions of foreclosures. As momentum builds for a national moratorium, the administration has begun assessing the potential impact, examining the threat it could pose for the ailing housing market and the wider financial system.

There is no evidence so far that the specific abuses made public in the past few weeks were known to government officials. Nor is it clear whether they were aware that the process of the selling and reselling of mortgages among financial firms - which became extremely common and highly profitable during the housing boom - was raising legal questions about who actually owned the loans and had the right to foreclose if they want bad.

But government officials were told repeatedly that the mortgage servicing industry was deeply troubled, according to administration officials, consumer advocates, housing lawyers and congressional aides. "Have we talked to them about servicer incompetence? Repeatedly. Have we talked to them how the servicer system is broken? Yes," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "Have we talked to them about the costly stream of errors made by servicers? Yes."

In meetings and letters to the government, consumer advocates and lawyers accused the servicer industry of violating its agreements with the government to help slow foreclosures, saying it instead was structured to accelerate the foreclosure process. "The message was that servicing needs to be regulated, and that the existing regulators of the servicers need to be on the job and needed to look at what has happened in the servicing industry," said Julia Gordon, a lawyer with the Center for Responsible Lending. "If it had been mandatory for servicers to engage in some kind of evaluation of the loan prior to foreclosure, you'd have seen a much different outcome for many borrowers."

Loan modification plansMany of the warnings came in the context of the administration's signature housing policy program, the Home Affordable Modification Program. The initiative seeks to rework the loans of struggling borrowers to make them more affordable.

As discussions about the program began in late 2008 and early 2009, consumer advocates and housing lawyers say they told senior officials that they had to escalate pressure on mortgage servicers to revamp their procedures if they hoped to stem the foreclosure crisis. In particular, the advocates and lawyers cautioned that servicers had incentives to foreclose and would only pay lip service to modifying mortgages.

In July of last year, a coalition of housing advocates and consumer lawyers wrote to the administration. "The Federal Government should use sticks that it has available to put pressure on servicers to fully comply" with the legal commitments they had made to federal officials about helping borrowers avoid foreclosure, the coalition said.

Several reports by government watchdogs, meanwhile, raised concerns that mortgage servicers were not up to the challenge presented by the staggering number of troubled borrowers, including many looking to modify their loans. The reports, from the Government Accountability Office and the Congressional Oversight Panel for the government bailout of the financial industry, warned that servicers employed staffers who gave borrowers inaccurate information, didn't hire enough staffers, failed to track complaints and lost important paperwork.

"Servicers are generally understaffed for handling a large volume of consumer loan workouts. Staffing is not simply a matter of manpower, but also of sufficiently trained personnel and adequate technological support," said a March 2009 oversight panel report.

Housing advocates and government reports gave several reasons why servicers try to foreclose so quickly. In general, servicers make more money when they foreclose on a loan than when they find a better arrangement for the borrower. That's because the payments to the servicer decline when a loan is modified. But if instead the borrower is in default, the servicer adds fees on the account and can collect when the house is sold, even at foreclosure. In addition, servicers are under pressure to continue to transfer the money paid by the borrower to the investor in the loan. When a borrower isn't paying the loan, the servicer has to cover the difference.

Moreover, servicers can expect to charge more if they receive higher ratings from credit rating agencies. And the faster a servicer forecloses when loans are in default, the higher the rating they stand to receive. So new businesses have emerged to accelerate the foreclosure process. Companies have launched electronic platforms that allow servicers to rapidly foreclose, quickly hiring lawyers to file necessary court documents in a process that is often divorced from the circumstances facing an individual borrower.

Problems outlinedIn an interview this week, a senior administration official confirmed that the White House and Treasury Department had received warnings that the mortgage industry employed inexperienced staffers to oversee foreclosures, had problems handling documents and communicating with borrowers, and often failed to comply with regulations. But the government had struggled to address shortcomings in the industry, the official said, because the administration was also seeking the servicers' help with modifying the home loans of millions of borrowers to help them avoid foreclosure.

In addition, a Treasury official said the federal government's power to tackle problems in the servicer industry is limited because foreclosure law is largely the domain of states. Both officials, who were not authorized to speak on the record but were providing the administration's views on the matter, said problems in the foreclosure process were largely the result of mortgage servicers being overwhelmed.

The only immediate response to warnings was a letter to servicers urging them to behave better. But in June, the administration enacted a policy requiring that servicers try to modify a loan before beginning the foreclosure process. "Though we cannot and should not prevent every foreclosure, the administration continues to work hard to stop preventable foreclosures and promote policies to stabilize the housing market and keep more Americans in their homes where possible," said Amy Brundage, a White House spokeswoman.

Brundage added, "We will continue to focus on implementing our existing housing programs and on working closely with appropriate agencies to ensure programs are working as effectively as possible and that all participants are complying fully with any and all applicable rules and laws."

Will the High Frequency Signing scandal be the proverbial straw on the camel's back. Perhaps. In the meantime, here is a soon to be viral, and all too real, parody of foreclosure gate. At this point the guilty parties are irrelevant. All that matters is that America's terminal collapse into a banana republic status is now obvious for all to see.

And as for Cramer saying foreclosure gate will only force home prices to go higher, pray tell dear Jim, just which buyers will put their own money into a home when they have no idea at what time the real title holder shows up with a restraining and eviction order, and demands immediate access.

Of course, there is a loophole: the Fed will simply henceforth pay for all home purchases. And should the government drop mortgage rates to zero, and subsidize tax and insurance payments into infinity, that may well happen. Of course, it will also bankrupt the country, but since when was America's insolvency news to anyone...

A top White House adviser questioned the need Sunday for a blanket stoppage of all home foreclosures, even as pressure grows on the Obama administration to do something about mounting evidence that banks have used inaccurate documents to evict homeowners.

"It is a serious problem," said David Axelrod, who contended that the flawed paperwork is hurting the nation's housing market as well as lending institutions. But he added, "I'm not sure about a national moratorium because there are in fact valid foreclosures that probably should go forward" because their documents are accurate. Axelrod said the administration is pressing lenders to accelerate their reviews of foreclosures to determine which ones have flawed documentation. "Our hope is this moves rapidly and that this gets unwound very, very quickly," he said.

With the reeling economy already the top issue on voters' minds, the doubts raised over foreclosures and evictions are becoming a political issue with the approach of Nov. 2 elections. Underscoring those pressures, two leading lawmakers took opposing stances on the wisdom of a moratorium. Rep. Debbie Wasserman Schultz of Florida, a top House Democrat, said she backed a foreclosure moratorium and government talks with the banking industry to concoct ways to let lenders reshape troubled mortgages. She said the foreclosure problem has been "extremely vexing" in her state.

The No. 2 House Republican, Rep. Eric Cantor of Virginia, said a national moratorium would remove the protections that lenders need. "You're going to shut down the housing industry" with a national stoppage, Cantor said. "People have to take responsibility for themselves."

In recent days, Senate Majority Leader Harry Reid, D-Nev., in a tough re-election race, urged five large mortgage lenders to suspend foreclosures in his state until they establish ways to make sure homeowners don't lose their homes improperly. Attorney General Eric Holder said that the government is looking into the matter, and Democratic lawmakers urged bank regulators and the Justice Department to probe whether mortgage companies violated laws in handling foreclosures.

The attorneys general of up to 40 states plan to announce a joint investigation soon into banks' use of flawed foreclosure paperwork, a person familiar with the investigation told The Associated Press late Saturday. On Friday, Bank of America became the first bank to halt foreclosures in all 50 states. Three other institutions – JPMorgan Chase & Co., Ally Financial's GMAC Mortgage unit and PNC Financial – have stopped foreclosures in the 23 states where foreclosures must be approved by a judge.

President Barack Obama vetoed a bill last week that would have made it easier for banks to approve foreclosure documents, which the White House said could hurt consumers. Axelrod spoke on CBS' "Face the Nation" while Wasserman Schultz and Cantor appeared on "Fox News Sunday."

Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?

Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back.

But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.

EK: And how much danger are the banks themselves in?

JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.

EK: My understanding is that this now pits the banks against the investors they sold these products too. The investors are going to court to argue that the products were flawed and the banks need to take them back.

JT: Many investors now are waking up to the fact that they were defrauded. Even sophisticated investors. If you did your due diligence but material information was withheld, you can recover. It’ll be a case-by-by-case basis.

EK: Given that our financial system is still fragile, isn’t that a disaster for the economy? Will credit freeze again?

JT: I disagree. In order to make the financial system healthy, we need to recognize the extent of our losses and begin facing the fraud. Then the market will be trustworthy again and people will start to participate.

EK: It sounds almost like you’re saying we still need to go through the end of our financial crisis.

JT: Yes, but I wouldn’t say crisis. This can be done with a resolution trust corporation, the way we cleaned up the S&Ls. The system got back on its feet faster because we grappled with the problems. The shareholders would be wiped out and the debt holders would have to take a discount on their debt and they’d get a debt-for-equity swap. Instead we poured TARP money into a pit and meanwhile the banks are paying huge bonuses to some people who should be made accountable for fraud. The financial crisis was a product of our irrational reaction, which protected crony capitalism rather than capitalism. In capitalism, the shareholders who took the risk would be wiped out and the debt holders would take a discount but banking would go on.

Bank of America, the nation’s largest bank, said Friday that it was extending its suspension of foreclosures to all 50 states. The plan swept states with some of the highest foreclosure levels, including California, Nevada and Arizona, into a swelling crisis over lenders’ flawed paperwork that had been mostly confined to 23 other states that require judicial review of foreclosures.

Bank of America instituted a partial freeze last week in those 23 states, and three other major mortgage lenders have done the same. The bank’s decision on Friday increased pressure on other lenders to extend their moratoriums nationwide as well. An immediate effect of the action will be a temporary stay of execution for hundreds of thousands of borrowers in default. The bank said it would be brief, a mere pause while it made sure its methods were in order.

But as the furor grows over lenders’ attempts to bypass legal rules in their haste to reclaim houses from delinquent owners, there is a growing expectation that foreclosures will dwindle for months as the foreclosure system is reworked. Stan Humphries, an economist with the housing site Zillow.com, said what was initially cast as a problem of sloppy record-keeping is rapidly evolving into one that suggests the banks’ procedures for recording loans might not have followed the law.

“The former scenario represents a hiccup for the market, maybe a 30- to 90-day slowdown in foreclosure initiations,” Mr. Humphries said. “The latter scenario is more like hitting a wall.” The uncertainty is putting the housing market in turmoil and causing vast confusion. Bank of America, for example, said it was not halting sales of foreclosed properties to new owners, but Fannie Mae, the giant mortgage holding company, is doing exactly that with properties it bought from Bank of America.

One real estate agent in Florida said Friday that he had six deals involving former Bank of America properties that had been at least temporarily scuttled. Representatives for Fannie, which was taken over by federal regulators after it failed two years ago, did not return calls. Real estate agents said the extent of any disruption depended on how long the moratorium lasted, how many lenders ultimately participated — and what people in default decided to do.

“If it’s still January, February, March, and they’re not foreclosing, you’ll see a big effect,” said Jim Klinge, an agent in San Diego. “It’ll be a banker’s holiday, free rent for everybody and a lawyers’ gold mine.”

As soon as Bank of America announced its freeze in a terse press release, Senate Majority Leader Harry Reid and Edolphus Towns, the New York Democrat who leads the House Committee on Oversight and Government Reform, both pointedly asked other lenders to follow suit. Increased pressure also came from Christopher J. Dodd, the chairman of the Senate Banking Committee, who announced a Nov. 16 hearing on foreclosures.

The other lenders, however, did not seem to be swayed. JPMorgan Chase, which has halted foreclosures in the 23 states where they need a judge’s permission, says it is putting hundreds of lawyers and executives to work addressing what it characterizes as a “technical” paperwork problem with 56,000 mortgages with improper documentation. Officials have no plans to halt foreclosures nationwide, and believe they can fix the problems within weeks, they said.

Chase officials acknowledge they had a flawed process, but they say they have not mistakenly foreclosed on any homeowners, because the underlying information is accurate. People close to the bank say that about one-third of the properties tied to mortgages under scrutiny are vacant, in line with their assessment of the overall industry. The average borrower that Chase has foreclosed on, these people added, has not made a payment on the mortgage for about one and a half years — a figure that they say is also consistent with the industry.

Inside Citigroup, which has not suspended foreclosures, officials said they were breathing a sigh of relief. Sanjiv Das, the head of CitiMortgage, began a review of loan servicing processes about 18 months ago in anticipation of a groundswell of foreclosures. At that time, Citi stepped up its employee training and tightened its documentation processes, giving officials there confidence that they have sidestepped the document issue. But given the huge number of mortgages it processed and its sprawling operations, Citi — which has faced one embarrassment after another — is not publicly declaring victory.

On Friday, Wells Fargo, another big lender that has not halted foreclosures, continued to maintain that its foreclosure processes were accurate and said it was not planning to initiate a nationwide moratorium. “As a standard business practice, we continually review and reinforce our policies and procedures,” said Vickee Adams, a Wells Fargo spokeswoman. “If we find an error or if an improvement is needed, we take action.”

Bank of America’s chief executive, Brian T. Moynihan, speaking at the National Press Club in Washington, said he did not believe the bank’s action would disrupt the housing market. “We haven’t found any problems with the foreclosure process and what we’re saying is that we’ll go back and check our work one more time,” he said.

Not only is Bank of America watched more closely as the nation’s largest bank, it also finds itself deeper in the subprime mortgage mess. It holds $102 billion in subprime loans on its balance sheet from the period when lending standards were most lax — 2005 to 2007 — more than JPMorgan Chase, Citigroup or Wells Fargo, according to a report by Christopher Kotowski, an analyst with Oppenheimer.

Bank of America’s troubled mortgage portfolio is a legacy of its July 2009 acquisition of Countrywide, a subprime specialist that was among the financial institutions with the most troubled loans, as well as its January 2009 merger with Merrill Lynch, which was a major player in the business of taking mortgages and transforming them into securities to be sold to investors.

In addition, as the beneficiary of two capital infusions by Washington under the federal bailout, Bank of America was among the banks most dependent on Washington to help survive the financial crisis, receiving $45 billion from taxpayers. Of that, $20 billion came in emergency aid after Merrill’s losses were revealed. That money has been paid back, but several analysts said the company was eager to maintain good relations with the government, and emphasized that restoring the bank’s public image was a crucial factor in the action on Friday.

“What prompted Bank of America is they see the political writing on the wall, and this has clearly become a political issue,” said Guy D. Cecala, the editor of Inside Mortgage Finance. “Almost every lawmaker is calling for a national mortgage foreclosure moratorium, and given the momentum out there, they wanted to deal with it on their own terms.”

In fact, earlier this year, with a government ban on automatic overdraft fees for debit cards looming, Bank of America actually went further than its rivals and pre-emptively eliminated the overdraft option entirely. Other banks allow customers to now opt in to the program, which can result in huge charges for small overdrafts.

Another reason for Bank of America’s broader action, suggested Richard X. Bove, an analyst with Rochdale Securities, is that the attorney general of the state where it is based, North Carolina, has called on the bank to halt foreclosures there. “It’s a pre-emptive strike,” he said. “The smartest thing to do is to get ahead of the attorneys general around the country on this.”

Attorneys general in about 40 states may announce by next week a joint investigation into potentially faulty foreclosures at the largest banks and mortgage firms, according to a person with direct knowledge of the matter.

State attorneys general led by Iowa’s Tom Miller are in talks that may lead to the announcement of a coordinated probe as soon as Oct. 12, said the person, who asked not to be named because an agreement wasn’t completed. The number of states may change because several are deciding whether to join, the person said. New Mexico Attorney General Gary King said yesterday in a statement that his office will join a multi-state effort.

Lawyers representing the banks expect a widening investigation, according to Patrick McManemin, a partner at Patton Boggs LLP, a Washington-based law firm that represents banks, loan servicers and financial institutions. Bank of America Corp., the biggest U.S. lender, yesterday extended a freeze on foreclosures to all 50 states.“We are aware of or involved in a large number of investigations that lead us to believe there are in the neighborhood of 40 state attorneys general who have initiated investigations or expressed an interest,” McManemin said in a telephone interview.

Justice DepartmentOfficials in at least seven states have already announced probes into claims that employees at home lenders and loan servicers signed court documents without ensuring the information was accurate. On Oct. 7, Miller said in a statement that he was working with state officials, banking regulators and the U.S. Justice Department to launch a coordinated review. Attorneys general in Ohio and Connecticut have said some of the practices may amount to fraud.

The Senate Banking Committee plans to hold a hearing Nov. 16 to investigate mortgage servicing and foreclosure practices, according to its website. “American families should not have to worry about losing their homes to sloppy bureaucratic mismanagement or fraud,” the panel’s chairman, Connecticut Democrat Christopher Dodd, said in a statement. “Regulators at the federal, state and local levels have a responsibility to uphold the law and protect consumers from unfair foreclosure.”

Frozen ForeclosuresBank of America, JPMorgan Chase & Co. and Ally Financial Inc. already froze foreclosures in 23 states where courts supervise home seizures, amid allegations that employees used unverified or false data to speed the process. Litton Loan Servicing LP, a mortgage-servicing business owned by Goldman Sachs Group Inc., said yesterday it’s halting some foreclosures to review how they’re handled.

Senate Majority Leader Harry Reid, a Democrat from Nevada, called on other banks and mortgage firms to follow Bank of America’s lead and “review their practices to ensure that they are not unfairly targeting homeowners in Nevada and across the nation,” according to a statement yesterday. “There are reasons for these procedures and those are to make sure the banks own the homes they are foreclosing on,” Robert Lawless, a professor at the University of Illinois College of Law in Champaign, said in a telephone interview. “At the same time I don’t think it is going to be a tidal wave of relief for homeowners. My bet is that there will be a delay.”

Vickee Adams, a spokeswoman for San Francisco-based Wells Fargo & Co., and Mark Rodgers, a spokesman for New York-based Citigroup Inc., said the companies were still processing foreclosures. Thomas Kelly, a spokesman for New York-based JPMorgan, and Gina Proia, spokeswoman for Detroit-based Ally, declined to comment.

Homes TakenLenders took possession of a record 95,364 homes in August and issued foreclosure filings to 338,836 homeowners, or one of every 381 U.S. households, according to RealtyTrac Inc., an Irvine, California-based data vendor. “If you have a national moratorium on foreclosures, that’s a problem,” Paul Miller, an analyst for FBR Capital Markets Corp. in Arlington, Virginia, said in a phone interview. “The longer you drag out foreclosures the longer it takes to get through” the housing slump, he said.

The big question from the mortgage meltdown isn't why so many distressed homeowners are defaulting on their loans. It's why any of them are still making payments.

In the worst-hit areas millions have no equity left, and little hope of seeing any anytime soon. The market value of their homes is far below the size of the mortgage. If they just stop paying, what is going to happen to them? In many cases they may get to live in the home rent-free for months, even years, until the bank gets around to seizing it. If Frank Abagnale—the con man played by Leonardo DiCaprio in the film "Catch Me If You Can"—were operating today, he'd probably be living rent-free in a super-luxury high-rise in Miami.

Consider the latest revelations. The big banks are so backed up with foreclosures that some of them resorted to hustling through repossessions without the proper paperwork. Some of them—including Bank of America, J.P. Morgan Chase and Ally Financial's GMAC Home Mortgage—have announced a temporary freeze in some states on further foreclosures while they sort through the mess.

In one case, a bank employee said she was approving 8,000 foreclosures a month. By my math, that's roughly one for every minute and a half. No, she wasn't reading all the documents thoroughly. (As one wit observed, the banks paid about as much attention to foreclosing on the loans as they did to making them five years ago.) In many cases, thanks to the fallout from securitization, it's not even clear who owns the mortgage. The payments may be due to different financial institutions around the world, some of which have gone the way of all flesh.

No wonder a fair number of borrowers have simply gone on strike. Nobody knows exactly how many are doing so deliberately—a so-called strategic default—though some estimates suggest these may account for nearly a third of recent defaults. According to the Federal Reserve Bank of New York, one mortgage borrower in five in Florida and Nevada is more than 90 days' late on payments, and in Arizona and California it's about one in eight. It's a wonder it's not more.

A while back I received an email from a woman in Florida that illustrates the issue. Her neighbor across the road had stopped paying his mortgage about a year and a half earlier, she wrote. He was still living in his "luxury condo," and the lender hadn't come after him yet. After all, he told her, they were so backed up with the housing collapse it might take them years. My correspondent—a lawyer—was wondering whether she was being stupid for continuing to make her own payments. After all, she, too, was deeply underwater; her mortgage was far bigger than the value of the home.

So what happens to those who simply go on strike? Even where the bank is coming after them to evict them, it is taking months, maybe years. During that time they are living rent-free. When they are evicted, the bank then puts the home on the market. It may take months more to sell. Let's assume it sells, but for a lot less than the size of the mortgage. What can the bank do then?

In some states, the bank can do very little. In so-called nonrecourse states—which include California and Arizona, two of the worst-hit in the housing collapse—banks basically have to eat the loss. In other states, the banks have some ability to come after the homeowners for the shortfall. But for most distressed homeowners, this threat is more theory than reality. Why? The banks have too many cases to handle. And distressed homeowners typically have so little in surplus capital that there may not be much point.

Imagine you're the bank executive. The loss on the home came to, say, $200,000. The borrower is unemployed, driving a 10-year-old Chevy and living on food stamps. In another state. Or he has a part-time job in gas station, maybe $2,000 in savings, and two kids. How much do you want to spend on lawyers and debt collectors to hunt him down? How much do you think you're going to get back, after costs? You've got 5,000 cases like this.

Indeed, there's a lot the banks can't touch anyway. Money held in a 401(k) account, pension plan or individual retirement account is beyond the reach of creditors. So is college money for the children or grandchildren if held in a 529 plan for more than two years. And so are other assets; it varies by state. Often life insurance is sheltered: That may include mutual funds held in a variable annuity account. Once the borrower files for bankruptcy, the lender ends up with nothing.

Assuming people have taken legal advice, and taken the smart steps, the rules give many of them strong economic incentives to stop paying. In some circumstances, there might be state-tax consequences. They may find it harder to get a mortgage in the future. And their credit score will get dinged, sure, but in the grand scheme of things, is this really a fate worse than death? The ruthless and the reckless have already walked. Meanwhile, the middle class continues to pay through the nose. It's that old "middle-class morality" that George Bernard Shaw mocked a century ago.

But is this really a case of morality anyway? I'll confess this issue makes me uneasy. But my feelings are almost certainly awry. We live, alas, in a world, and an economy, which rewards ruthless self-interest and penalizes "morality." Just look at the big banks.

A mortgage isn't a blood oath, it's a business contract—a collateralized loan. It isn't simply a promise to repay the lender. It's a promise to repay the lender or to forfeit the home. Isn't someone simply fulfilling their contract by handing over the keys when asked? The banks knew full well what the fine print said when they made the loan. And so they should: They wrote the fine print. The economy will suffer if more homeowners default. But it will suffer if they don't. Those bad debts are doomed and need to be written off. Why should the homeowners eat them rather than the banks? Why is the reckless lender more at fault than the reckless borrower?

Japan struggled for 20 years with "zombie banks"—so called because their debts, if properly recognized, made them insolvent. Here in America, we have millions of zombie homeowners. Why is this any better?

Businesses make secured loans against property or collateral all the time. If the loan goes bad, the lender takes the collateral. Nobody expects executives to dip into their own pockets (a fortunate thing, as they never do). Bank executives pocketed tens of millions in the run-up to the financial crisis, directly as a result of the phony profits from reckless lending. Stockholders pocketed billions in dividends for the same reason. If the taxpayers hadn't stepped in, those banks would have collapsed and creditors would have lost a fortune. But they would have had no recourse—absent proof of fraud—against executives or those who owned equity.

Look through the financial statements of the big companies involved in the housing market, including major homebuilders and property developers, and you'll find frequent references to all the "nonrecourse financing" they've obtained. It's a boast. "Look," they're telling stockholders, "even if things go bad, the lenders can't touch us." Apparently the only people who haven't gotten the memo are the middle class. For how much longer?

The overwhelming fact of the global currency system is that America needs a much weaker dollar to bring its economy back into kilter and avoid slow ruin, yet the rest of the world cannot easily handle the consequences of such a wrenching adjustment. There is not enough demand to go around. Asian investment in plant has run ahead of Western ability to consume. The debt-strapped households of Middle America, or Britain and Spain, can no longer hold up the dysfunctional edifice. Asians must take over, or it will come down on their own heads.

The countries actively intervening in exchange markets to suppress their currencies – China, Japan, Korea, Thailand, even Switzerland, to name a few – are all too often the same ones that have the biggest trade surpluses with the US. They are taking active steps to prevent America extricating itself from the worst unemployment since the Great Depression, now 17.1pc on the latest U6 index and rising again.

Each country is doing so for understandable reasons: Japan to avoid a deflationary crisis, China to hold together a political order that is more fragile than it looks. In both these cases they are trapped because they clung too long to a mercantilist export strategy, failing to wean themselves off American demand when the going was good. Yet this is an intolerable situation for the US. It should be no surprise that Washington has begun to retaliate in earnest, and not just by passing the Reform for Fair Trade Act in the House (not yet the Senate), clearing the way for punitive tariffs against currency manipulators.

The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 `a l’outrance’ to flood your economies with excess liquidity. We will cause you to overheat and drive up your wage costs. We will impose a de facto currency revaluation by more brutal and disruptive means, and there is little you can do to stop it. Pick your poison.

This is what QE2 means, though Fed officials prefer to talk of their “mandate” of supporting employment. It is nothing like QE1, which was emergency action to halt the economic free-fall of late 2008 and early 2009. This time the Fed is using QE as a long-term tool to manage America’s chronic ailments. Uber-dovish Fed comments over recent days have been enough to send the dollar crashing to a 15-year low of 82 against the Japanese yen, to below parity against Swiss franc, and back to the EMU pain barrier of $1.40 against the euro.

There was much tut-tutting about currency warfare at the IMF meeting over the weekend. "If one lets this slide into protectionism, we run the risk of the mistakes of the 1930," said World Bank chief Robert Zoellick. You have to say this kind of thing if you run a Bretton Woods institution, but in real life wars occur because somebody finds the status quo unacceptable, perhaps justifiably so. As Nobel economist Paul Krugman puts it: “people are looking for innocuous ways to deal with this problem, and there aren’t any”.

Devaluation was not the mistake of the 1930s: it was the cure, albeit a bad one. The Gold Standard broke down during the inter-war years because the US and France had structurally undervalued exchange rates (like China/Asia today) and ceased recycling their trade surpluses (like China/Asia today). This caused a deflationary downward spiral for everybody. Escaping from such a deformed system was a path to recovery. The parallel with modern globalization – though not exact – is obvious. So is the 1930s lesson that currency and trade clashes are asymmetric: they are calamitous for surplus countries, but not always for deficit countries. Britain enjoyed a five-year mini-boom after retreating into an Empire trade bloc in 1932.

Fed chair Ben Bernanke knows his history. In a speech as a junior Fed governor he described Roosevelt’s 40pc devaluation against gold as “an effective weapon” against deflation and slump, adding “1934 was one of the best years of the century for the stock market”. I suspect that the Bernanke Fed is working with the Treasury to steer the dollar lower, and above all to stop it rising again, since the global dollar index looks poised for a powerful rebound. There is certainly something odd about the latest Fed rhetoric. New York chief William Dudley said inflation had fallen to “unacceptable” levels. Has it really? The Dallas Fed’s `trimmed-mean’ CPE inflation index has been creeping up over the last three months.

His Chicago colleague Charles Evans has called for “much more accommodation". Why now? Bank credit has stopped contracting. The M2 money supply growth has accelerated sharply to a 7.4pc rate over the last month of published data. The St Louis Fed’s monetary multiplier has edged up at last. By the Fed’s own account, the double-dip scare of the early summer has abated.I happen to think that the Fed will need to launch QE2 on a big scale as US fiscal tightening bites, the inventory spike fades, and the housing foreclosure crisis gathers pace. But we are not there yet. Fresh QE cannot be justified at this juncture under any normal understanding of central bank policy.

Is the Fed in reality trying to shore up consumption by juicing asset prices, and trying to ensure that the effect boosts jobs at home rather than in China, Germany, or Japan by holding down the dollar? This is a dangerous moment for the world, and may backfire against the US itself. We are already starting to see the same sort of rush into oil and resources that played such havoc in mid-2008, and may have been a key trigger for the Great Recession. There is a risk that this commodity shock will hit before QE stimulus filters through.

And while the French deny that they are in talks with China over the creation of a new currency regime, I heard French finance minister Christine Lagarde say in person at a meeting in Italy that France would use its G20 presidency to push for an alternative to the dollar. She specifically cited the “Bancor”, the idea floated by Keynes in the 1940s for a commodity currency priced off a basket of metals. The US risks gambling away the “exorbitant privilege” it has enjoyed for two thirds of a century as currency hegemon.

Yet the surplus states have most to lose if this brinkmanship tips into commercial war. They must know this, but what we are witnessing may run deeper than a calculus of advantage. Was it naïve to think that Confucian Asia and the old democracies of the Atlantic seaboard can share an open global trading system?

Stocks, gold, commodities.... they are all going up in lock step. How many talking heads have you heard in the last month or two say that many stocks are correlated making buying indexes as good as trying to pick a basket of stocks? I have heard that more times than I can count from memory.

Well, you are not really any wealthier for the investing you are doing in stocks, precious metals or commodities. At least, not if you are investing using the U.S. dollar as your currency. As Steve Hansen pointed out in his review of a Bernanke speech Monday, the dollar is behaving in a way that doesn't make sense to many observers. Bernanke was talking up fiscal responsibility, but the dollar continued dropping. It seems that just the thought that their might be further quantitative easing was enough to overcome anything else that might effect the value of the dollar.

Everything is going up? Not quite as much as the dollar is going down in many cases, as seen in the following graph from the 5-Min. Forecast:

As Edward Harrison pointed out, when priced in Euros the big advance in September for the S&P 500 was actually very unremarkable with the price on October 4 only about 0.8% higher than on August 26:

All that seems to be happening, on average, is a milling around to accommodate changes in the relative value of the dollar.

In related news, the head of the IMF, Dominique Strauss-Kahn, warned that currency wars were not the way for countries to solve their internal problems. This comes after an article this weekend by Jason Rines discussed the internal issues that the U.S. and China each should be addressing instead of fighting over currency valuations.

For a number of years I reported on the monthly nonfarm payroll jobs data. The data did not support the praises economists were singing to the “New Economy.” The “New Economy” consisted, allegedly, of financial services, innovation, and high-tech services. This economy was taking the place of the old “dirty fingernail” economy of industry and manufacturing. Education would retrain the workforce, and we would move on to a higher level of prosperity.

Time after time I reported that there was no sign of the “New Economy” jobs, but that the old economy jobs were disappearing. The only net new jobs were in lowly paid domestic services such as waitresses and bartenders, retail clerks, health care and social assistance (mainly ambulatory health care services), and, before the bubble burst, construction.

The facts, issued monthly by the US Bureau of Labor Statistics, had no impact on the ”New Economy” propaganda. Economists continued to wax eloquently about how globalism was a boon for our future.

The millions of unemployed today are blamed on the popped real estate bubble and the subprime derivative financial crisis. However, the US economy has been losing jobs for a decade. As manufacturing, information technology, software engineering, research, development, and tradable professional services have been moved offshore, the American middle class has shriveled. The ladders of upward mobility that made American an “opportunity society” have been dismantled.

The wage and salary cost savings obtained by giving Americans’ jobs to Chinese and Indians have enriched corporate CEOs, shareholders, and Wall Street at the expense of the middle class and America’s consumer economy. The loss of middle class jobs and incomes was covered up for years by the expansion of consumer debt to substitute for the lack of income growth. Americans refinanced their homes and spent the equity, and they maxed out their credit cards.

Consumer debt expansion has run its course, and there is no possibility of continuing to drive the economy with additions to consumer debt. Economists and policymakers continue to ignore the fact that all employment in tradable goods and services can be moved offshore (or filled by foreigners brought in on H-1b and L-1 visas).

The only replacement jobs are in nontradable domestic services, that is, those jobs that require “hands-on” activity, such as ambulatory health services, barbers, cleaning services, waitresses and bartenders--jobs that describe the labor force of a third world country. Even many of these jobs are now filed with foreigners brought in on R-1 type visas from Russia, Ukraine, Thailand, Romania, and elsewhere.

The loss of American jobs and the compression of consumer income by low wages has removed consumer demand as the driving force of the economy. This is the reason expansionary monetary and fiscal policies are having no effect. The latest jobs report issued today shows that America’s transformation into a third world economy continues. The economy lost 95,000 jobs in September, mainly due to cuts in local education and federal employment. Part of the loss of 159,000 government jobs was offset by 64,000 new private sector jobs.

Where are the new jobs? They are in nontradable lowly paid domestic services: 32,000 were in health care and social services, and 33,900 were in food services and drinking places. There you have it. That is America’s “New Economy.”

With few services left to cut, little left to tax and almost no political will or legislative experience to move past partisan bickering, the state budget was bound to be a disappointment.

It was another prolonged Sacramento production, full of bickering, posturing and inaction that led to the latest state budget in modern history and provided a convenient target for the gubernatorial candidates, who say things would be different if they were in charge. One of them will be put to the test come January, when California starts the exercise all over again. Gov. Arnold Schwarzenegger and the current crop of lawmakers are leaving much of the $19-billion deficit for either GOP nominee Meg Whitman or her Democratic rival, Jerry Brown.

The most optimistic projections show that the spending plan Schwarzenegger signed Friday will produce a shortfall of at least $10 billion — more than 11% of state spending — in the next fiscal year. Many experts predict it will be billions more. The leaders mostly papered over this year's gap, punting many tough decisions forward. The failure of lawmakers, again, to set the state on firm financial footing highlights Sacramento's dysfunction. But it is also a reflection of a state in which the economy has been sour so long, and revenue has dwindled so much, that there are few places left to cut spending.

Broad tax increases have already been put in place, and more are not politically viable. Complicating the problem are the public's expectations of what government can accomplish with the state's shriveled tax base. "We're going in the wrong direction fast, " said Bob Hertzberg, a former Assembly speaker who co-chairs the nonpartisan think tank California Forward. "There is a big pile of work waiting on the desk of whoever is governor next. But I don't think the outcome will be any different" from this year no matter who is elected, he said, "because the demands are so difficult."

All the problems that have haunted the budget process for years were in full force this time around, many of them more pronounced than ever. The state's volatile tax system — which economists have consistently warned is too reliant on the fortunes of the wealthy — caused revenues to continue dropping. The lack of a substantial rainy-day fund left the state without emergency reserves to blunt the blow.

Term limits ensured that relative novices had significant control over the complicated and politically charged task of negotiating a budget. The Assembly speaker and minority leader, whose most important job is to help hammer out a spending plan, had never been involved in budget talks before. And none of the legislative leaders has the kind of clout over their caucuses that their counterparts had in days past, making compromise and the necessary two-thirds vote of the Legislature much tougher to come by.

The governor's lame-duck status hurt his already limited ability to move things forward. So did his chilly relationship with his own political party, which undermined any power he might have had to pressure Republicans to work more purposefully toward a bipartisan agreement. The public was largely cut out of the process, along with the legislative rank and file. The influence of special interests loomed large, with the biggest ones able to persuade — or bully — some lawmakers into rallying their colleagues behind untenable demands, prolonging the stalemate.

Schwarzenegger administration officials say there is a silver lining. They point to concessions made by unions that roll back some of the generous pension benefits state employees have received over the last decade. New hires will get more modest retirement benefits, limiting the contributions taxpayers must make to keep the pension fund solvent. The budget package also places on the 2012 ballot a measure that would create spending controls to force lawmakers to build a bigger rainy-day fund.

But other budgeting measures, pushed by good-government groups seeking to bring some fiscal stability to California, stalled in the Legislature, beaten back by corporate interests and unions anxious that they could lose influence if the system were too radically changed. As for the deficit, some say this just wasn't the year to wipe it out. Government services have already been sliced by several rounds of brutal reductions. With revenue continuing to plunge, they say, there's a point at which delaying a deficit solution does less harm to the economy than confronting it.

"In some ways, this is a reasonable ending point," said Jean Ross, executive director of the California Budget Project, a think tank that focuses on how the budget affects low-income residents. As the sour economy has limited lawmakers' will to take bold action, the public is increasingly confused about what their taxes are paying for and what sacrifices would help bring the state into the black.

In a survey of 1,000 Californians conducted in June by the Pew Center on the States and the Public Policy Institute of California, half of respondents believed state spending could be cut 20% or more with no impact on services. The report points out that the state would have to eliminate the equivalent of its entire prison system, all welfare programs and all transportation spending to save that much.

The authors went to Mike Genest, Schwarzenegger's former budget director, for some perspective. "Reality hasn't caught up with the voting public," Genest told them. "Politicians have made it sound like there are other alternatives, like we can simply get rid of fraud, waste and abuse and [have] a spending freeze and … have the same kind of government we've always had. … That's just not true."

Susan Urahn, a managing director at the Pew Center, says California's incoming governor, whoever it is, should be under no illusions. "There will likely be a fairly short honeymoon," she said. "The problems are so significant."

Although much of the Republicans'"Pledge to America" is given over to a discussion of economic issues, there is one topic that is never mentioned: the dramatic rise in income inequality. As with global warming, Republicans seem to have decided that the best way to deal with this fundamental challenge is to deny it exists.

If you asked Americans how much of the nation's pretax income goes to the top 10 percent of households, it is unlikely they would come anywhere close to 50 percent, which is where it was just before the bubble burst in 2007. That's according to groundbreaking research by economists Thomas Piketty, of the Paris School of Economics, and Emmanuel Saez, of the University of California at Berkeley, who last week won one of this year's MacArthur Foundation "genius" grants.

It wasn't always that way. From World War II until 1976, considered by many as the "golden years" for the U.S. economy, the top 10 percent of the population took home less than a third of the income generated by the private economy. But since then, according to Saez and Piketty, virtually all of the benefits of economic growth have gone to households that, in today's terms, earn more than $110,000 a year.

Even within that top "decile," the distribution is remarkably skewed. By 2007, the top 1 percent of households took home 23 percent of the national income after a 15-year run in which they captured more than half - yes, you read that right, more than half - of the country's economic growth. As Tim Noah noted recently in a wonderful series of articles in Slate, that's the kind of income distribution you'd associate with a banana republic or a sub-Saharan kleptocracy, not the world's oldest democracy and wealthiest market economy.

In trying to figuring out who or what is responsible for rising inequality, there are lots of suspects. Globalization is certainly one, in the form of increased flows of people, goods and capital across borders. So is technological change, which has skewed the demand for labor in favor of workers with higher education without a corresponding increase in the supply of such workers. There are a number of other culprits that come under the heading of what economists call "institutional" changes - the decline of unions, industry deregulation and the increased power of financial markets over corporate behavior.

Over time, more industries have developed the kind of superstar pay structures that were long associated with Hollywood and professional sports. And then there is my favorite culprit: changing social norms around the issue of how much inequality is socially acceptable. Economists spend a lot of time trying to quantify precisely how much responsibility to assign to each of these, but in truth the death of equality is much like Agatha Christie's "Murder on the Orient Express": They all did it.

There are moral and political reasons for caring about this dramatic skewing of income, which in the real world leads to a similar skewing of opportunity, social standing and political power. But there is also an important economic reason: Too much inequality, just like too little, appears to reduce global competitiveness and long-term growth, at least in developed countries like ours.

We know from recent experience, for example, that financial bubbles reduce equality by siphoning off a disproportionate share of national income to Wall Street's highly-paid bankers and traders. What may be less obvious, but not less important, is that the causality also works the other way: Too much inequality can lead to financial bubbles.

The liberal version of this argument comes from former Labor secretary Robert Reich in his new book, "Aftershock." Because so much of the nation's income is siphoned off to the super-rich, Reich says, a struggling middle class trying to maintain its standard of living had no choice but to take on more and more debt. I have some problem with the argument that the middle class had no choice, but it's certainly true that the middle class and the economy as a whole would be in better shape today if households weren't burdened with so much debt.

The more conservative version of this argument comes from University of Chicago economist Raghuram Rajan. In his new book, "Fault Lines," Rajan argues that in order to respond to the stagnant incomes of their constituents, politicians took a number of steps to keep the "American Dream" within reach, including subsidization of home mortgages and college loans. He might have added that politicians also were quick to cut taxes for the middle class even when it meant running up the national debt to pay for popular entitlement programs and government services.

Concentrating so much income in a relatively small number of households has also led to trillions of dollars being spent and invested in ways that were spectacularly unproductive. In recent decades, the rich have used their winnings to bid up the prices of artwork and fancy cars, the tuition at prestigious private schools and universities, the services of celebrity hairdressers and interior decorators, and real estate in fashionable enclaves from Park City to Park Avenue. And what wasn't misspent was largely misinvested in hedge funds and private equity vehicles that played a pivotal role in inflating a series of speculative financial bubbles, from the junk bond bubble of the '80s to the tech and telecom bubble of the '90s to the credit bubble of the past decade.

The biggest problem with runaway inequality, however, is that it undermines the unity of purpose necessary for any firm, or any nation, to thrive. People don't work hard, take risks and make sacrifices if they think the rewards will all flow to others. Conservative Republicans use this argument all the time in trying to justify lower tax rates for wealthy earners and investors, but they chose to ignore it when it comes to the incomes of everyone else.

It's no coincidence that polarization of income distribution in the United States coincides with a polarization of the political process. Just as income inequality has eroded any sense that we are all in this together, it has also eroded the political consensus necessary for effective government. There can be no better proof of that proposition than the current election cycle, in which the last of the moderates are being driven from the political process and the most likely prospect is for years of ideological warfare and political gridlock.

Political candidates may not be talking about income inequality during this election, but it is the unspoken issue that underlies all the others. Without a sense of shared prosperity, there can be no prosperity. And given the realities of global capitalism, with its booms and busts and winner-take-all dynamic, that will require more government involvement in the economy, not less.

International Monetary Fund meeting dominated by fears that US job crisis will add to currency tensions with China

The International Monetary Fund was seeking to defuse growing tensions over global currencies yesterday amid fears that the US will respond to its stubbornly high unemployment figures by slapping tariffs on Chinese goods. With China refusing to bow to pressure from the US and Europe to revalue its currency, the annual meeting of the IMF was dominated by concerns that Washington is on the point of losing patience with Beijing. Finance ministers and central bank governors gathered in a gloomy mood, expecting no quick fix to the problem – despite a warning from the IMF that failure to tackle the global jobs crisis could threaten democracy.

Latest figures for the American labour market, released on Friday, showed 95,000 jobs were shed in September, adding to the problems of the Obama administration ahead of next month's mid-term elections. The poor outlook for jobs in the US has alarmed the Federal Reserve, which is expected to announce a fresh wave of quantitative easing next month, and added extra spice to the row between Washington and Beijing.

Dominique Strauss-Kahn, the IMF's managing director, warned that "we face the risk of a lost generation", adding: "When you lose your job, your health is likely to be worse. When you lose your job, the education of your children is likely to be worse. When you lose your job, social stability is likely to be worse – which threatens democracy and even peace. So we shouldn't fool ourselves. We are not out of the woods yet. And for the man in the street, a recovery without jobs doesn't mean much."

Tim Geithner, Obama's treasury secretary, said: "The United States believes that global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery. "Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand-led growth in countries running external surpluses and by the extent of foreign exchange intervention as countries with undervalued currencies lean against appreciation."

Zhou Xiaochuan, China's central bank governor, did little to satisfy Washington's demand for quick action on the yuan, when he said Beijing was committed to gradualism rather than "shock therapy" when it came to the revaluation of its currency. European policymakers also expressed deep concern about the impasse after the euro hit $1.40.

The chairman of the group of eurozone finance ministers, Jean-Claude Juncker, said part of the problem was a lack of a suitable forum for bringing currency negotiations to a point. Two years ago, the G20 group of developed and leading developing nations was formed in an attempt to find a collective solution to the world's economic problems. But policymakers have become increasingly frustrated by the unwieldy nature of the G20.

"In the G20 framework there are too many people and too many interests to be able to find a currency arrangement," Juncker said. "The ideal forum would be G7 plus China." Jean-Claude Trichet, the president of the European Bank, said: "We must keep the spirit of co-operation that we had during the crisis … we must avoid the beggar-thy-neighbour policies that I see looming."

Significant belt-tightening beckons as rises in tax and National Insurance and cutbacks in benefit payments begin to take effect. Middle-income families will be £4,000 a year worse off by 2013 in light of the decision to scrap child benefit for higher-rate taxpayers. Calculations for The Sunday Telegraph show that a family earning £50,000 could be £4,000 a year worse off after all of the Coalition's tax and benefit changes are implemented, while the cost of living is also predicted to rise.

"This will mean significant belt-tightening for many families," warned Patricia Mock, a tax partner at Deloitte, who said couples with a single wage earner on £50,000 would be particularly affected. By 2013, when child benefit is cut, she calculated that a family with two children at this income level could have £3,036 less a year to spend. The family would also be hit by an increase in VAT, which Stephen Herring at accountants BDO calculated would cost them a further £250 every year. In addition to this, families will lose one-off payments such as the initial £250 into their child's trust fund and a £250 top-up at the age of seven, as well as the £190 health-in pregnancy grant.

Accountants calculate that a family with two children and a single earner on £50,000 a year willlose out on £1,752 of child benefit every year from 2013. However, the pain will start much earlier, since the level of child benefit has already been frozen. This means that the real value of payments will fall by £109 before the cut takes effect. People will also lose out on tax credits, while paying extra National Insurance contributions and VAT.

Mike Warburton, a tax partner at Grant Thornton, said the Government had created a "toxic combination for families". "People who are working very, very hard have a bitter pill to swallow," he said. He feared that the rate at which higher-rate tax kicks in might fall dramatically by 2013, possibly to below £40,000, meaning that even more families would be affected by the cut. However, the Treasury disputes this. Over the next three years, hard-working families will face the following raids on their finances.

Loss Of Child Tax CreditsFamilies who earn less than £58,000 currently receive some form of child tax credit from the Government. This is worth up to £5,150 a year for a family with two children, but tapers off at the rate of 39p for every pound earned above £16,190. Families with a baby under one receive a further £545. However, from next April a household earning more than £41,329 will not receive the child element of the family tax credit (up to £2,300) while the family element (worth £545 a year) will be scrapped for those earning over £41,329. The extra £545 for anyone with a baby has been scrapped completely. Ms Mock calculated that a family with a baby and an income of £50,000 would lose £1,090 in tax credits from 2011/12, although this includes the baby element of the tax credit.

Loss Of Child BenefitChild benefit has been a universal benefit since its inception, paid to anyone with children, currently at a rate of £20.30 a week for your first child and £13.40 a week for each subsequent child. From 2013 it will not be paid to anyone who earns more than the higher-rate tax threshold, which is currently just under £44,000. Even if only one person in the family earns more than this amount, the benefit will not be paid. This means that a family with one stay-at-home parent will lose out on the benefit if the working parent earns more than £44,000, but a family with two working parents can earn nearly twice as much and still keep it. The cost to a family with one earner on £50,000 would be just over £1,700 a year.

Changes in personal allowances and national insurance contributionsNumbers used in the emergency Budget suggest that although the personal allowance (the amount you can earn before paying tax) will increase, the basic-rate limit will be reduced so that higher-rate taxpayers do not benefit. The precise amount has not been announced, but the numbers used in the emergency Budget implied that higher-rate taxpayers would actually see a rise in tax of £100 every year as a result of this change. Increases in National Insurance contributions from 2011/12 are likely to cost the £50,000 family a further £114.

VAT RiseFrom January, VAT will rise from 17.5pc to 20pc. Shopping website Mysupermarket calculated that the tax rise would add £33 a year to the average grocery bill and would also have an impact on clothes, travel, services and fuel. Mr Herring calculated that a family on £50,000 would be hit by £250 a year of added costs because of the VAT rise.

Other Family BenefitsThe Government scrapped a number of other family-friendly benefits in June. These included the £190 health-in-pregnancy grant, paid to pregnant women to help them eat well before birth, and the child trust fund. The Government contributed £500 into each child's savings account (£250 at birth and a further £250 at the age of seven).

The disaster that buried three Hungarian villages in caustic red sludge this week is deepening the gloom of a country gripped by recession, polarization and the near-ubiquitous feeling that its people are doomed to be victims of calamity. Gyoergy Hoffmann, a coal miner in Ajka, a city near the spill, called it "just the latest stroke of fate" for a country dominated for centuries by foreign powers — first the Turks, then the Austrians and finally the Soviets, who turned the country into the communist bloc's main producer of alumina.

For decades, Hungary made the aluminum ingredient and shipped it to Russia, which sold the metal back to Hungary and other Soviet bloc nations at world market prices. Swept by euphoria and national unity after the collapse of communism, Hungary considered itself ahead of its neighbors in cleaning up the environmental sins of the Soviet era. Rusting, polluted factories and abandoned garbage dumps, once common along Hungary's back roads, have become a rare sight.

But alumina plants remained active, including the factory outside the village of Kolontar, where the rupture of a wall holding waste sludge dumped up to 184 million gallons (700,000 cubic meters) of highly polluted water and mud onto three villages in about an hour Monday. At least seven people were killed by the caustic muck and hundreds were injured. Hungary's prime minister said Saturday that the cracking wall of the reservoir could collapse at any moment and send a new wave of caustic red sludge into the devastated towns.

Environmental groups, meanwhile, are warning of other potential disasters, among them seven storage ponds about 60 miles (100 kilometers) northwest of Budapest that hold 12 million tons of sludge accumulated since 1945 — more than 10 times the amount that spilled this week. "If the gates break there, much of Hungary's drinking water would be endangered," says WWF official Martin Geiger. Such worries add to the burdens of a people whose national psyche has been formed by centuries of foreign domination, internal turmoil and economic hardships. "There have been too many national cataclysms for Hungarians to be able to overcome their pessimism," says sociology professor Antal Bohm. "This catastrophe is simply one more in the series."

Some of the recent gloom is understandable. Hungary's economy contracted by almost 7 percent last year and the country has been forced to draw on about two thirds of a lifeline of 20 billion euros — nearly $28 billion — thrown by EU, the International Monetary Fund and the World Bank two years ago. Nearly 2 million people are groaning under growing debt as the strong Swiss franc makes their loans in that currency insupportable. Hungarian households' foreign currency loans equaled 26.2 billion euros — $36.46 billion at the end of June, with nearly 80 percent in Swiss francs, says the National Bank of Hungary. Of the 1.8 million people with such loans, 400,000 are behind on their payments — with 100,000 in arrears by three months or more.

With the hard times comes the need to find scapegoats, allowing the far-right Jobbik party to emerge third-strongest in April national elections after a campaign tinged with anti-Semitic and anti-Gypsy rhetoric and marches by a black-uniformed militia founded by its leader. Those militia have been banned. But a party ad referring to "Gypsy criminals" was aired on state radio and television before recent municipal elections. The ad also described corrupt politicians, banks and multinational companies as "parasites" sucking on the country's blood — language used by the Nazis to describe Jews.

Bohm, the sociologist, puts those facing poverty at around 30 to 40 percent of the population, adding: "This isn't a situation they imagined they'd be in 20 years after the change of system."The gloom probably contributes to the EU's second-highest suicide rate, after Lithuania — more than 21 out of every 100,000 people in 2007, according to EU statistics. Among the more famous suicide victims is Rezsoe Seress. The composer of "Gloomy Sunday," one of Hungary's most popular ballads of all time that premiered in the 1930s, killed himself in 1968.

"Little white flowers won't wait for you, not where the black coach of sorrow has taken you," the song goes. "Angels have no thought of ever returning you, would they be angry if I thought of joining you?" Even the national anthem is downbeat. Adapted in the 19th century from a poem bearing the subtitle "From the rough centuries of the Hungarian people," it pleads to God to pity a people "long by waves of danger tossed."

No wonder "Hungarians always see their glass as half empty," Bohm said. Asked how Hungarians see themselves, he responds: "Constant losers."

The U.S. Department of Agriculture sliced its harvest projections for corn, soybeans and wheat, throwing fuel on a three-month-old commodity rally and deepening worries about rising food prices. The agency's decision to cut its month-old corn projection by 3.8% startled traders, who had expected a far smaller reduction. Prices of corn-futures contracts at the Chicago Board of Trade soared Friday by their daily permissible limit of 30 cents. The corn contract for December delivery settled at $5.2825 a bushel, up 6%.

The USDA reduction was the largest in percentage terms since a similar-size cut in 1995, and the largest in bushel terms since at least the 1970s, according to Rich Feltes, vice president for research at broker R.J. O'Brien. The USDA still expects U.S. corn farmers to harvest what by historical standards is a huge crop: 12.7 billion bushels, the third biggest ever.

Economists expect farmers to respond to high grain prices by planting millions more acres of corn and wheat, which should benefit sellers of seed and chemicals to farmers such as Monsanto Co. and DuPont Co. But so much of U.S. farmland is already in production that some acres might have to be cannibalized from other crops, potentially tightening supplies of other commodities.

Unusually rainy and hot weather in August and September combined to dent the yield potential of many farm fields after what had been an unusually good start to the growing season. Ron Warfield, a Gibson City, Ill., farmer, said Friday that his fields produced 200 bushels of corn an acre on average last year, but about 50 bushels less on average this year. Mr. Warfield, who said he usually makes his planting decisions by early December, might wait until February or March to decide how many acres of corn and soybeans to plant. "We're going to see some extremely volatile markets, based on this report."

The government's cut in its harvest projection is having such a big impact on markets because demand for grain is red hot, thanks in part to the accelerating economies of emerging nations such as China, which is expected to consume roughly a quarter of all the soybeans grown in the U.S. this year, and perhaps a third of all U.S. cotton. The drought that stopped Russia's wheat exports this summer also is lifting U.S. grain exports.

Corn consumption is so high that the corn harvest now foreseen by USDA economists could leave the U.S. with the tightest reserves since the mid-1990s by this time next year. Unlike then, the U.S. doesn't have nearly as much idled farmland to shove into production. The USDA projected Friday that the U.S. will have 902 million bushels of corn left over before the 2011 harvest begins to replenish supplies, which would be down a whopping 47% from this year's reserve.

"The U.S. will have had its four biggest corn crops in the past four years, but supplies are still tight," said Luke Chandler, director of agricultural commodity research in the London offices of Rabobank, a large agricultural lender. "It's almost becoming a precarious situation." The USDA on Friday also cut its projection of the U.S. soybean crop by 2% to 3.41 billion bushels, which would still be a record-large crop, and sliced 1.8% from its wheat-production estimate to 2.22 billion bushels.

The commodity-price surge couldn't come at a worse time for the U.S. food companies, which are leery of passing along price increases to consumers worried about the high unemployment rate. While retail food prices are climbing this year at the slowest rate since 1992, some economists said Friday that rising commodity prices will likely cause the food inflation rate to accelerate next year.

Grain prices could have enough momentum to stay high into next year, making it hard for companies to dodge higher costs. CBOT corn futures prices are trading near or above the $5-a-bushel level into July 2013. Michael Swanson, an economist at banking giant Wells Fargo & Co., said he expects retail food prices to climb 3% to 4% next year, and he said he might revise that forecast higher.

Stoneleigh's lucid presentation and now this great post by Ilargi have me wondering something that's been bugging me.

I read many financial blogs, from the semi-mainstream (Calculated Risk, bonddad) to TAE and Zero Hedge. The thing that some anti-doomers comment on at ZH is that in the end the powers that be (the Fed, IMF, ECB, etc.) step in and take action to prop things up and those who were proclaiming that everything is going to come crashing down are shown to be wrong. And as much as I hate to admit it, the anti-doomers (or maybe anti-permabears is a better term) may be right.

Here's the thing I'm wondering - Stoneleigh and Ilargi - you've both made many seemingly right observations that things are going to start unwinding soon (I've seen you both indicate you think it could start unwinding by the end of the year or Q1 2011), but what I don't get is why you think the Fed can't paper over things one more time. That is, you often say that those who are deluded think that "it's different this time" (regarding bubbles) but it seems you may be claiming that it's different this time that the Fed or others won't be able to step in and throw everything they have at papering over the problem to drag things on for another couple of years. I'm not saying this a good thing, but it is what it is, and if the markets lead the economy and the Fed props up the markets, well...

It seems to me that they will step in and throw everything they have at it. Given that, how do your projections change, or have you already factored in Fed (IMF/ECB/...) action and if so how?

A poster (Popo) on ZH gave a succinct and insightful perspective on the Inflation vs. Deflation debate --

The term "inflation" has been used for over a century to mean different things to different schools of Economics.

Inflation can be used to describe the general effect of the expansion of the money supply: Rising Prices.

Or it can be used to describe the expansion of the money/credit supply itself. (This latter definition is the one used by the Austrian school, btw)

Furthermore, the limited definition of "inflation" which pertains only to rising prices was championed by Keynesians who of course would rather you not notice expansions of money and credit. ie: Please notice the rising prices, not the shrinking value of the dollar which is entirely our fault.

More importantly: (Second response) There seems to be a very limited understanding on ZH of price-effects in a deflationary environment.

The layman's understanding of pricing under a deflationary credit contraction is that prices 'decrease'. And that is mostly true. But as we have seen throughout all historic depressions, while it may be "mostly" true, it is also very commonly not the case. Why? Because collapsing credit (and the associated capacity-overhang which defines deflations) causes implosions of industry, and such implosions of industry cause supply-chain disruptions. Supply chain disruptions frequently create scarcities in a wide variety of related products whose respective demand-levels have not yet collapsed. Such supply-chain disruptions frequently cause rising prices of specific goods and services in a deflationary environment.

Other increases in pricing occur from increased credit to specific industries, which can cause distortions in speculation (such as in commodities) and pricing. Such limited increases in credit, (and their corresponding distortions in asset pricing and speculation) are not representative of net monetary expansion.

This is not at all a reworking of the definition. This is part-and-parcel of an understanding of the microeconomic effects of a macroeconomic deflation.

To all those who point to rises in granular pricing data and proudly conclude "inflation", you are missing the forest for the trees.

Jesus what a mess - this is all like watching a train wreck in slow-motion.

I can't help but wonder if this is the thing that is going to push a lot of people into strategic default. I guess we will know in a few months when the banks report the delinquencies. Or maybe they will fudge those figures too..

I expect the Hitler video will get taken down due the copyright violation. I have seen that same clip used multiple times in the past related to different subjects and with different subtitles, and in the past it has always been removed after a few days.

I am getting less and less interested in the intricacies of this financial system and the astonishing charts that make my eyes glaze over. I am more and more interested in what will happen as people become aware. The rate at which awareness is spreading seems to be increasing. That is why I appear to be overly curious about Comfrey, I guess.

During the past few weeks I have been taking an informal poll of my many and varied friends, neighbors and associates, asking them where they get their information about current affairs. Many of them no longer have TV's. If they do, most report watching "public TV and the History Channel." People over 70 still claim to read the NY Times or the Washington Post from cover to cover. But everyone listens to NPR. This is the source of news and information for middle-brow middle-of the-road Americans. Fox News is the choice of the religious and those who describe themselves as conservative. Even those people in my town occasionally listen to NPR.

I myself have no TV and haven't seen any Fox News in years, but my impression is that Glenn Beck and his ilk are talking a bit about peak oil? Is that true?

In any case, I am wondering what structural or corporate impediments there are to trying to get some of the local NPR stations to begin to inform people about what is coming down the pike (sooner or later, to be sure.) Any thoughts?

A poster (Popo) on ZH gave a succinct and insightful perspective on the Inflation vs. Deflation debate --"

That is very close to what we've been endlessly repeating here. Well thought-out and nicely balanced. One minor point: Inflation wasn't much used at all for a long time, and certainly rarely 100 years ago. The term then for the perverse rising prices definition was "depreciation".

The attempt to change the meaning of the word may have been successful in confusing just about everybody, in that it leaves no term with which to describe what inflation really is, but that is truly ludicrous, since economics very much needs a term for the core meaning of what inflation is. The idea put forward by those who chose to start changing the meaning is to call it “monetary inflation", but that does nothing but claim there's all sorts of "possible different inflations".

Now I think this leads to definitions void of any meaning, consumer inflation, price inflation, energy inflation, and inevitably down the line cookie inflation, but when I just Googled "cookie inflation", the example I've often used, the first link to my use of it came in only 16th, with the majority of the preceding ones discussing it as a serious definition.

I guess I’ll digress for now. They can all have their inflated cookies and eat them too, for all I care.

@LynnHarding - Many people I know do not have time to watch TV or read anything. I appear to be the only one who reads blogs. Many do listen to NPR who is airing segments about the foreclosure fraud crisis. Yet, no one wants to talk about how they could be affected. One person did say the fraud was not intentional, just mistakes. Other people come right out and tell me to stop talking about it, they can't do anything anyway. Then I reply, because of all the fraud, that everyone needs to think what they're going to do when they can't get the money from their savings accounts, pension, IRA, 401(k), etc. And then I get the rolling eyeballs. Zombies, indeed.

" I am more and more interested in what will happen as people become aware. "

One of the top options, based on history, is that "people" - will never actually become aware. Seriously. All kinds of very bad things will happen; and it's quite likely that huge proportions of us will still believe with full religious fervor that last year 98% of all Usacos lived happily in Beaver Land (as in leave it to).

And as soon as their new political choice is elected, everything will be fine. It's always been fine, you know.

Lynn,You'd think that the "Public" in NPR would imply something like public service. But you'd be wrong. Or, rather, they can't help inform people about what is happening because they, like most people, are clueless. I've been working at it with my local station for years.

With the destruction of credit comes the inevitable decline in valuation of those assets purchased with credit, housing being only the most visible example.

The fact that most other larger-ticket items purchased on credit have plummeted in value -- automobiles, home furnishings/improvements, etc. -- is really nothing new. Finished goods at retail have always declined in value.

But let us look at what has become, for most of the middle-class, the second most-expensive purchase after housing -- education. What has happened to that asset's value?

It is now patently obvious to most of us that there are millions of young people graduating every year with a newly-minted degree. An "education" that leaves most of them with massive debts in the range of $75k - 150k+. And what kinds of jobs are they reaping from this extensive outlay of time and money? You already know.

Fact is, that the overwhelming majority of these graduates are taking low to minimum wage jobs that do not require anything more than a High School diploma, if that. Wages that will never allow them to pay down (much less PAY OFF) their massive debts. And yet, this hoax of the absolute necessity to obtain a 4-year-college degree is still being eaten up by the large majority of middle-class parents & kids.

All those golden jobs have long since been outsourced, and after these kids return home following graduation to live with mom & pop, yet another class will be graduating a few months hence.

When I hear that the local hospital is downsizing its Radiology Department, because now they can email digital x-rays to India where certified Medical Doctors there will do interpretation and diagnoses for 25% the price of American doctors, does that tell you where the future is for so-called Higher Education?

Today, if a teenager asks me what field they should major in during college to be sure of getting a job, I tell them to just forget about a four-year-degree, period. My recommendation is to go to a trade school and learn a hands-on skill. Last I heard, auto mechanics are in short supply and at this point nobody is shipping automobiles to China for repairs.

Archdruid - Who's first is moot, but that it's a metaphor worth repeating is likely vital! BTW, Appreciation of your very relevant and innovative efforts is quite large among those of us who frequent TAE.

Draft - "It seems to me that they will step in and throw everything they have at it..."I wonder what "they" have left to throw in? More debt? The kitchen sink? But I sometimes feel like you, and Jack Russell, who noted" ...it's like watching a train wreck in slow motion!"

Jerry McManus - Check out the Quakers!

Lynn Harding - "...NPR stations to begin to inform people about what is coming down the pike..."I would love to see (hear) it but it is not happening anywhere here in the midwest. NPR reports still are littered with terms like "...the recovery..." and "grow the economy", etc.I had a guest in for the weekend and his response to my concerns about debt and peak resources was "...oh they'll come up with something to keep things going.!" This is a working, articulate CPA who works for The Balanced Scorecard company. The train wreck is so slow the passengers don't even know it's happening!

ilargi, I am missing something here. If banks had been allowed to whip through the foreclosure process it seems to me they would be stuck with a lot of houses to flip and what would that have done to the market other than crash it? If they are obliged to take a longer route I would expect prices would hold better and they could slowly be sold off with better return. What is different now then from the beginning when the main effort was to keep the mess under cover? Will those mortgages be kept hidden and the banks have more time to deal with losses or is there some mechanism that will force delinquent mortgages out in the open with a lawsuit attached?

As well once foreclosed it leaves the bank as landlord and need either sell or rent the joint or allow it to return unto dust.

When the banks are pulled from life support, and everyone in my neighborhood becomes unemployed, who is going to foreclose on all the houses the pennyless are living in? Who will throw us out of our houses? Who will come after us to pay the property taxes? Police? Mercenaries? Government agents?

In regard to "mark to fantasy" assets, I'm reminded of a story I heard long ago about inmates at a particular German concentration camp. They had cans of sardines which they would trade back and forth amongst themselves, functioning as money for the inmates. One day a new inmate opened up one of the cans and a horrendous stink wafted throughout the camp. The other inmates berated him, saying "Hey, those sardines are for trading, not for eating!"

Ilargi, I would love to purchase the presentation, but our internet (though it's *supposedly* high speed) is about dial up speed. So please hurry with the DVD production and I'll happily purchase one of those.

Dear Son #1 went to a private trade school to become an FAA certified mechanic; he doesn't make enough to pay back his student loans, and even though he works for a govt contractor, he's not eligible for forgiveness.

DS #2 I paid for his tuition by cashing out vacation time; I only hope he can actually get a job. He wants to be a nurse eventually...in this economy I just don't see that happening.

DH is going to school because he hasn't worked at more than part time (if that) in over a year. He too is planning to become a nurse, since he has nearly 20 years experience as a paramedic. I have my doubts about his ability to get a job as well -- see above.

I keep trying to convince both of them to find a hobby that can end up bringing in money (or be used for bartering) like black smithing or furniture repair. I also keep trying to convince both of them that having the biggest garden you can afford is the best security you can have.

Brian and Ilsa—the nice upper-middle-class retired couple, who always follow the rules, and never ever break the law—who don’t even cheat on their golf scores—even when they’re playing alone (“Because if you cheat at golf, you’re only cheating yourself”)—have decided to give their bank the middle finger.The Coming Middle-Class Anarchy

This put me in mind of another Ilsa:

Ilsa: You're saying this only to make me go.

Rick: I'm saying it because it's true. Inside of us, we both know you belong with Victor. You're part of his work, the thing that keeps him going. If that plane leaves the ground and you're not with him, you'll regret it. Maybe not today. Maybe not tomorrow, but soon and for the rest of your life.

Ilsa: But what about us?

Rick: We'll always have Paris. We didn't have, we, we lost it until you came to Casablanca. We got it back last night.

The days of higher education equating to a well paid seat warming job are over, we are rapidly heading into a future where utility production and self sustenance as a way of keeping oneself occupied will be the norm for a large section of the poulation, I can see most all of higher education becoming meaningless outwith the confines of medicine and selected technology sectors.Non productive academia driven career opportunities are toast.

@ Lynne.H and Bluebird

I'm alawys on the lookout for a mood change, and I've noticed some people are now beginning to twig they've been had, but don't know how.They're not blog readers, politicos or particularly interested in financial matters....they just feel they've been had.The catalyst, I suspect, is the tightening noose that chokes a little more of the air out of their financial breathing space every month.

Yes, Glenn Beck does talk about peak oil sometimes, I've heard him. I'm not really in sync with Glenn and what he believes but his comments on the economy and peak oil have been worth listening to. I don't know if his solutions for the economy are any good. I hear him on the radio in the car somedays, mostly I listen to the classical station in the car these days.

I've always been a news junkie and the past 3 years with event and retirement time, I've become even worse about listening to many sources for whatever they've got to say. I'm not sure this always a good thing! Too many voices in my head telling me contradictory things.

I still have a TV and get regular broadcast, no cable or dish stuff, and I do listen to the MSm that's on there, mostly NBC and CBS. They certainly NEVEr mention anything like peak oil. PBS Newshour has never mentioned it either.

Of course, I'm here, too and at other blogssome agree with Stoneleigh's scenario, some don't.

Two of my friends will discuss economic and financial and other doom things with me. My hair stylist says I know "that scary stuff."!

Other people I know seem to want to talk about what could be coming, some I don't know. Perhaps anxiety about the future would upset people too much if they really did talk about it and they're not sure how they'd be perceived for what ever reaction they'd have to open discussions.

I'd really like to know how people believe the smaller banks will survive if the TBTF's fall due to Foreclosuregate.

Part of the problem, as I asserted yesterday, is the fact that this fraud WAS the US economy. It accounted for literally millions of jobs (in one form or another), and was the impetus for most any meaningful large purchase (HELOCs, etc.) people made.

Another part is the involvement of the government, which really brings into question how the system and currency remain intact once this all explodes.

@Ilargi"The banking system is on life support. Can we agree on that? And the nation as a whole sees its credit life-blood contracting like a roof on fire, and therefore depends on the banking system to extinguish the flames."

Hell yes I can agree on that, but I have come to believe in an even uglier scenario. With every one of these "document scandal" headlines, with every news story about the banks screwing some newly reemployed homeowner by refusing to allow federal programs specifically to allow them to keep their house, and especially, when the headlines start in the next month or so about the record-breaking bonuses these blood-sucking squid bastards are going to be taking home around Christmas time, another few hundred people are going to realize that by paying an attorney a relatively small amount of money to take Bank of America or Chase or Wachovia over the hurdles and make THEIR mortgage the one the banks realize is not worth fighting over, then the shit really hits the fan. When Joe or Jill six pack who has a house that is worth half what they paid for it, realizes that there is no real moral reason to keep paying that mortgage to a bunch of scumbags who thrive in immorality and they can live for 3 or 4 or 5 years for free by screwing said scumbags, then the center is lost. I could really give a crap what happens to banks, etc., because I am at a point where I personally think I could live without them. It is really starting to worry me, however, what all of this is teaching us about morality and how we live with each other in a civilized society.

Your comment is precisely why I refuse to make a specific call about when the real wakeup moment will hit.

There are multiple problems here. First is that there exists entities, like the Federal Reserve, whose primary goal is to keep the system afloat at almost any cost. Another is that people have a vested interest in stability and don't want to choose the alternative voluntarily. Yet another reason is that people like ourselves are already outside the mainstream and therefore we cannot see things in the same light as the remaining "true believers" who want things to muddle through. I am sure that we can think of other reasons as well.

This is why Ilargi's Wile E. Coyote metaphor is so appropriate. We don't know exactly when Wile E. Coyote will begin to fall, but we know he's going to fall.

Can the Fed paper this over again and again and again? Yep. But you notice we're not getting any real economic growth here? You notice that unemployment is increasing rather than decreasing?

There is a limit to this mess but from our limited human vantage points we can't see it clearly. We're looking through a glass darkly and while we know there is a cliff out there somewhere, we're not really certain of where it sits.

However, there are two things we can count on - the cliff exists and we haven't altered course as a society. That means that eventually we'll hit that cliff and over the edge we'll go.

Climatologists used to make a big deal that hurricanes never spawned in the South Atlantic with a true reversed wind pattern true to the southern hemisphere. But in the last 10 years storms like that have finally begun to spawn as climate change advances. For decades prior, such storms were "impossible" yet they finally did occur once we crossed a certain boundary in climate change.

Likewise, we don't know where the financial boundary line actually lies but it's out there and on this current course, we will cross it. The only question is when, not if.

The reason that NPR should be encouraged (if possible) to address peak oil is that we would hate to have people saying that only Glenn Beck told them the truth. We know that Wile Coyote will fall, though we don't know when. We also know that he will appear again in another cartoon. Who he is in the next cartoon will depend upon his animator. Let it not be Glenn Beck!

It is a good thing that ASPO has gone to Washington. I hope they start by trying to get extensive coverage on NPR. I think that Stoneleigh is a very able spokesperson and should give it a shot.

Non-linear catabolic collapse in action. The middle class has been eroding for decades. Check out Elizabeth Warren’s March 2007 speech at UC Berkeley (The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards and a Shrinking Safety Net http://www.youtube.com/watch?v=akVL7QY0S8A).

Imagine what would have happened without the property bubble? Quite possibly a continuation of the generally linear decline in the middle class. Perhaps too slow for some. Like a last gasp, the bubble pumped wealth (savings depleted, debt remaining) out of the middle class very rapidly. They (we) believed they were getting richer, while most were heading in the opposite direction. Zombies think they’re alive when they’re not, or think they are “upwardly mobile” when they’ve already reached lower class.

But it seems that “impurities” in the wealth transfer pump has caused a bit of a jam. I don’t see any benefit to the lenders, loan servicers or creditors. Options have a value, and losing the option to foreclose quickly or to sell a non-performing loan isn’t a business benefit. It’ll be interesting to see what the repair will be…probably not what the average person might like.

Home prices are stuck at temporary artificial sugar highs. Or maybe it's crack. In order to raise home prices, you need 1) a healthy financial system, 2) a solid drop in unemployment, and 3) a way for the average American who still has a job to clear their debt and start spending again.

What is missing in the three things that are required for redemption (no pun related to mortgages) is PRODUCTIVITY. Nobody EVER mentions the lack of productivity in the financial economy, housing, etc., etc. The three things above are will not exonerate this economy w/o incremental wealth building through productivity (at least, a true measure of it--not the hedonics of the recent past). R.

The notion keeps coming up that the Fed can pump whatever funds are needed into the system to stave off collapse. Insofar as the banks are concerned, I think that looks like it could be possible. What I got from Damon Vrabel's video was that the world is divided with banks and central banks on one side and individuals, businesses and governments on the other side, almost all in debt to the money changers. The Fed does have unlimited capacity to create credit and they have been busy extending it to the banks. The banks turn that liability into an asset by putting the funds back on deposit at the Fed earning interest. The money pile on their side of the divide just keeps growing.

Having finally learned that loading immense liabilities on our balance sheets results in them not getting their expected return of filthy lucre, they are not willing to shovel much of that credit our way.

I think Damon has chosen correctly to focus on balance sheets. What I think I see is an asymmetry in the flexibility of the parties across the divide. We do not have an easy way to convert a liability into an asset. Therefore we are subject to hard limits on how much credit we can absorb. With most of our balance sheets top heavy with liabilities and assets being stripped and depreciating, collapse of the consuming, productive and directive sectors is proceeding apace.

The banksters may not have to worry about running out of credit, but Max Keiser's comment on PressTV about the IRA perhaps turning bankster hunters, suggests they could run out of places to hide. We, of course, have no place to hide and really no place to run.

One is tempted to wonder if old John of Patmos, were he to be resurrected today, might look around and say something like "well, I was pretty close." BTW, is that the sound of four riders on horseback I hear?

Since the days when the Clintstones debauched in the big inaccessible house on Pennsylvania Ave, the public broadcasting networks have been forced to rely much more heavily on funding from rather more ideologically conservative sources. They still pump lots of culturally interesting programming, but their news units seem to be just as neutered as the commercial networks. You didn't really think they would leave that base uncovered, did you?

The search results are interesting and quite revealing. I've been watching this space a long time, and Wile E Coyote has been cruising the whole time. How many more times do you intend to write "watch this space" to convey a collapse that never happens?

Nassim Nicholas Taleb, author of “The Black Swan,” said investors who lost money in the financial crisis should sue the Swedish Central Bank for awarding the Nobel Prize to economists whose theories he said brought down the global economy.

anon10,I think guys like Nassim Taleb and myself have a natural advantage over "pure-bred" Westerners. We have both witnessed with our own eyes dramatic things that got reported in the Western media in an altogether different way from the way we actually saw and experienced them. We have a built-in bullshit detector - that is why I am here :)

We learnt from a young age to question anything on the media - especially the TV. As an 8-year-old, I had the son of the local omnipotent dictator in my class at school. Even at that age, I could see the dichotomy - the public façade versus reality. I mean the teachers were terrified of this little boy and gave him, unfailingly, top marks for crap work. Once at the annual school day, the boy's father showed up and invited my Grandfather to join him in the sport stadium's presidential box. They took pictures of us kids and, the next day, in the "semi-official" newspaper of this country, my picture was on the front-page with a caption detailing the event and the name of my classmate - he was behind me. A big mistake as I had blond hair at that time. I still have the picture somewhere.

Some people had their awakening only nine years ago and some never will. They will be awaiting for rescue from the government till the last moment. "If only Obama/Bush/Clinton knew" or "it was the fault of his bad advisers" are expressions to look out for. In Solzhenitsyn's Gulag Archipelego, he wrote that the favourite sayings of Old Bolsheviks in the Camps were things like "there must be mistake", "I am not like you others, I am a real communist"

Ric - re: The Coming Middle-Class AnarchyThanks for the interesting link. These folks are out there in the millions and increasing with time. The house behind mine is empty--almost 2 years now--and the couple divorced, etc. A sad mess all around. As I read about Ilsa and hubby I wondered about their political persuasion, but am thinking that severe economic stress trumps any previous party alignments or leanings!BTW, Casablanca is my all time favorite, It was quoted here at TAE earlier this week re: The ponzi bankers..."I am shocked... shocked... to find that gambling is going on in this establishment!" :-)

at Some Assembly Required, the proprietor has posted his expectations for the next few years - basically more of the same, but worse, no sharp inflection points - maybe his optimism is justified"?

Just read it, and wondered if Ilargi and Stoneleigh have a counterargument. I honestly am not sure who to believe any more, and really the question to me is "will action taken by those in power succeed in turning an outright crash into a slow-and-steady decline, and if not why not?" I'd love to see their answer to it because it seems to be a crucial point to figuring out what will happen in the near future.

1) The projection that there will not be sharp crash-like declines in the markets in at least the next several years, largely due to the intervention of various bodies (the Fed, IMF, ECB, ...).

2) That unemployment will at worst grow by a few percent, not more severely.

Don't get me wrong - I'm in agreement with you both on the circumstances, but I'm confused about how things are still plodding along and wonder if Fed/etc. intervention is actually more powerful than I had thought in keeping the status quo generally going for a long time to come. I'm trying to understand what's going on and more than that how long (1 quarter? 1 year? 1 decade?) they can keep it going like this. (In the back of my mind is Stoneleigh's comment from earlier this year that within about 6 months she expected to see things unwinding...that's about a month away now, and I'm wondering if it's going to happen.)

As the price of goods and services fall, thanks to the destruction of purchasing power brought about by collapsing money supply, what cash you still have will go a lot further in terms of, say, milk and bread.

But also wrote...

As a much larger percentage of a much smaller effective money supply would be chasing essentials, these would receive relative price support, making them even less affordable than everything else. If we later see scarcity of essentials, due to the collapse of global trade and the just-in-time economy, it is possible that prices would begin to rise again in nominal terms despite deflationary deleveraging. For nominal prices to rise during deflation, they would have to be going through the roof in real terms. The interaction of various factors will determine prices, but the deflationary contraction of credit is a given, and deflation can render things unaffordable far more quickly and comprehensively than inflation.

You're wrong about that. Stoneleigh said that deflation would make things less affordable, but a side-effect of deflation is that prices do go down (but purchasing power decreases because incomes go down by more, etc.)

By the way, Google has been developing a price index independent of official statistics, and they've found that there's a clear deflationary trend underway despite the inconclusiveness of other data:

"Skip said...Stoneleigh has said deflation willlead to falling prices which will make things like bread and milk more affordable."

You should read more carefully the background pieces instead of misquoting. I&S have been consistent in saying that essentials would become less affordable.

The operative phrase in your second quote is "what cash you still have will go a lot further". In price terms, the cash you have now will go further (even for some essentials). But since wages will be in decline as well as prices, the cash you earn in the future may not (especially for essentials).

I know that I find the concepts of inflation/deflation difficult. I think the real hindrance is being aware of the concept of relative cost. I think that people continue to think that the amount of money they have coming in or available through pensions or savings will remain the same, but the costs of goods will increase or decrease. I can wrap my mind around inflation, the prices are rising faster than my income - We've all had experience with that. it's understanding the effects of deflation that I find confusing. I was able to purchase and watch Stoneleigh's presentation and the slide illustrating the effects of deflation really helped. The presentation is very helpful.

The other day saw me reading through archives, where I stumbled across a series of economic forecasts in Mother Earth News.

Since it's early days, Mother Earth News Economic Outlooks were consistently calling for 'periods of gloom, changing to doom, becoming severe at times.' Case in point:

November - December, 1980:

Regular readers of this column — and, indeed, most folks who've bothered to keep an eye on the spending power of those dollars that we all work so hard to obtain — are well aware that "things ain't like they usta be" as far as the world economy (and opportunities for "little guys" to accumulate enough cash to actually get ahead) is concerned.

In fact, since this column was "born" way back !n MOTHER NO. 35, we have pointed out over and over again that the free ride which began with the colonization of North America, South America, South Africa, Australia, New Zealand, etc. — and was accelerated by the availability of inexpensive, "below-value" petroleum energy — is all but over.

Worse yet, despite its rocketing Inflation and swelling unemployment figures, 1980 may well look like "the good old days" before the next year, or two years, or three years are over. And it's highly unlikely that the results of this autumn's election — regardless of whatever surprises come to pass between this writing and November 4 — will make a danged bit of positive difference as far as that gloomy future is concerned.

However (and, to repeat what regular readers of MOTHER have learned long since), the hard times that are very likely to come don't have to bring suffering down upon your household. And they won't, if you simply start, right now, to get yourself and your family out of the "paper promises" economy of E-Z Loan credit companies, and the compulsive consumerism that our "leaders" are still saying can save us all . . . and take whatever steps are necessary to put your faith in (and begin to base your lifestyle upon) common sense, real wealth, and self-reliance...."

When peaking at their Halloween forecast, I found no mention of zombies whatsoever.

Instead I found a tasty tidbit on Walter Prescott Webb's book, The Great Frontier. In it (apparently), he discusses a South Pacific "Cargo Cult" metaphor which was recently attached to the Tea Party in a blog for Psychology Today.

"As the price of goods and services fall, thanks to the destruction of purchasing power brought about by collapsing money supply, what cash you still have will go a lot further in terms of, say, milk and bread.

On July 5th "The unbearable mightiness of deflation" in paragraph 7...quote

"Deflation would be associated, at least initially, with prices falling across the board, falling by perhaps 90% in nominal terms,"

and paragraph 8....

"For nominal prices to rise during deflation, they would have to be going through the roof in real terms... and deflation can render things unaffordable far more quickly and comprehensively than inflation."

So... does one hold cash because it is king and will buy you MORE of life's essentials...or not?

Or are you better off investing the cash in commodities, as they seem to be skyrocketing in nominal terms despite the deflation, as to make sure you can afford the essentials going forward?

Deflation causes prices to fall by undercutting price support. This does not make things cheap however, as purchasing power will be falling faster than price. that happens because access to credit disappears and it becomes very difficult to earn an income. Either jobs disappear or they become very uncertain, and even jobs that survive end up seeing wage and benefit cuts. With less money in the system to push up prices, prices fall.

What money is left will be worth more and more in terms of what it will be able to buy, but hardly anyone will have any. If you preserve purchasing power as liquidity (cash and cash equivalents), then it will go a long way. For those who still have scarce cash, falling prices really will make things cheap as prices fall, but for everyone else (ie most people who will have very little cash at best) things will be less affordable at low prices than they used to be at high prices.

From the AP - "Federal Reserve considers 2-step plan to boost economy""WASHINGTON -- The Federal Reserve is leaning toward taking two steps to boost the economy: Buying more Treasury bonds to drive down loan rates, and signaling an openness to higher prices later to encourage more spending now."

There seems to be two camps. In the larger camp the money pyramid is right side up with money at the top and various derivatives of money making up successive levels of the base. They believe this because that is how pyramids are in nature. From salt to boulders, pyramids are narrow at the top and wide at the bottom. Unfortunately, artificial financial constructs can defy nature, common sense or even sanity. We just have to add more credit and derivatives at a fast enough rate and there will be enough for everyone. The smaller group sees the money pyramid as it really is, an inverted pyramid. An unstable, unsustainable accident waiting to happen. The faster it is built up the sooner it will all come crashing down.

@Skip, and others wanting precise predictions.IMO it's like estimating a construction job (or a destruction job might be more relevant). Sometimes the progress of expected events is rapid, sometimes slower than estimated. This is a unique situation and nobody can know for sure about timing.You can pilfer through the writings and speeches of anyone and find a few apparent inconsistencies as language is not a precise medium of thought transfer, nor is one's own interpretation.It's going to rain soon. Tomorrow? Maybe. Next week? I don't know. A month from now, very likely. But it's going to rain... and soon.

"As the price of goods and services fall, thanks to the destruction of purchasing power brought about by collapsing money supply, what cash you still have will go a lot further in terms of, say, milk and bread.

Prices fall as the combination of tightening access to credit and uncertain employment (ie collapsing collective purchasing power) undercut price support. What cash YOU have left (at a time when very few will have any at all) will go a lot further than it did before. For those who preserve purchasing power as liquidity, that liquidity will buy more in the future than it would now. Only a very few will be in that position though.

On July 5th "The unbearable mightiness of deflation" in paragraph 7...quote

"Deflation would be associated, at least initially, with prices falling across the board, falling by perhaps 90% in nominal terms,"

Yes, prices fall a long way, but purchasing power (for the vast majority who have not preserved capital as liquidity) falls even further, making things less affordable for almost everyone.

and paragraph 8....

"For nominal prices to rise during deflation, they would have to be going through the roof in real terms... and deflation can render things unaffordable far more quickly and comprehensively than inflation."

Occasionally, nominal prices can rise in a deflation, if something is sufficiently scarce and important. This would be unusual, but since it applies to the most important things, it needs to be discussed. I do not suggest that this would happen right away. Initially, everything should fall in nominal terms. There should be an excess of virtually everything because demand will have fallen off a cliff and production was geared to the previous level of demand.

Demand collapse sets up a supply collapse though, because the combination of low prices and a cost structure that falls more slowly knocks investment on the head, and also removes the money necessary for maintenance of infrastructure (oil pipelines, electricity transmission lines, water pipes etc). Once you have a supply collapse, nominal prices are likely to rise, meaning that real prices are rising much more sharply under a deflationary scenario. IMO oil and other necessities will bottom early in this depression.

So... does one hold cash because it is king and will buy you MORE of life's essentials...or not?

Yes.

Or are you better off investing the cash in commodities, as they seem to be skyrocketing in nominal terms despite the deflation, as to make sure you can afford the essentials going forward?

Commodities should fall very sharply first and then rise later. If you have a lot of money (ie enough to have no debt, cash and commodities), then you could buy commodities now. Otherwise you'd be better off to hold off until the prices fall. We're looking at a commodity top at the moment, so prices have a long way to go to the downside, arguably fairly soon.

It's coming, but not yet. It's not unlikely, actually, for essential, but it doesn't happen immediately. My guess is that scenario is a couple of years away at least. In the Great Depression, oil bottomed in 1931, the financial markets bottomed in 1933 and the depression continued until 1939. We should see a similar progression this time.

I think we are seeing a blow-off top in the markets, and I would expect a reversal (probably sharp) in the not too distant future. We should see a whole constellation of trends reverse at about the same time, because they all depend on the ebb and flow of liquidity in the market, which is determined by the ebb and flow of confidence. I think we should see a fall in stocks and commodities and a rise in the dollar (especially versus the euro).

"Of course, there is a loophole: the Fed will simply henceforth pay for all home purchases. And should the government drop mortgage rates to zero, and subsidize tax and insurance payments into infinity, that may well happen. Of course, it will also bankrupt the country, but since when was America's insolvency news to anyone..."This is called "Homesteading". You get land from the government for a filing fee, and you have to improve it. When you consider that the economy as we know it is a false production system, and homesteading is a real useful production system...well, we see why economists aren't solving our problems, especially when they are working for capitalists.

The following seems to be the best summary of the bank fraud. http://www.prisonplanet.com/at-the-root-of-the-crisis-we-find-the-largest-financial-swindle-in-world-history-where-counterfeit-mortgages-were-laundered-by-the-banks.html

“At the Root of the Crisis We Find the Largest Financial Swindle in World History”, Where “Counterfeit” Mortgages Were “Laundered” by the Banks

Could we still see a disruption (or indeed cancellation) of sorts to the UK olympics should the fiscal situation deteriorate significantly enough between now and 2012? I used to think so , but it now seems we'll scrape through, although it might be the last ever. How fitting.

Thanks very much Stoneleigh for clarifying. I had thought that the CRB index falling from the 600's to now roughly 200 was the bottom, but I believe your stance is that this is just a counter trend rally, with much more downside to come. My thinking was based on my thinking the CRB had bottomed and was rallying sharply and we might be past the time where cash is king, at least for the commodities and essentials. I can now see I should probably have a 2 tier strategy to hedge for deflation in debt-type assets, and hedge for inflation in the essentials. I will be watching the CRB for a break below 200. Thanks for helping to clarify my thinking (and for helping me understand yours), and for putting out your great Century of Challenges video. I will certainly recommend it to others!

Here's a simple story. #1 person has $10,000 in the mattress and no debt. #2 person has no money saved. Both have jobs and bread is two dollars.

Comes the depression and now bread costs one dollar. Both #1 and #2 lose their jobs and unemployment is essentially a soup line but no money. #1 finds the price of bread lower by half and can afford twice as much as before. #2 finds the price of bread unaffordable because s/he has no money.

Everyone wonders what to do here and now. TAE has provided a good plan but YMMV.

Note: I’m an old guy and I knew those values long before Y2K and before the Stone Lady was born. I think the boomers and later generations are in deep kimchi because they never saw a serious depression up close and personal.

Any predictions about what's likely to happen to the pound after the Spending Review next week? Down because the economy is going to take a staggering hit, or up because the markets like austerity programmes?

The mood seems to have changed in the last couple of weeks in Britain. The BBC is talking now about a train crash in the making for middle income families, with child benefit withdrawn and taxes going up and much larger university fees than we've ever had before. Those are the people who voted for this government because they thought Labour was taxing them too much in order to redistribute their money to the poor, and they're also the target audience for the media. They're quite aggrieved already.

A mathematician, an accountant and an economist apply for the same job.The interviewer calls in the mathematician and asks "What does two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."Then the interviewer calls in the accountant and asks the same question "What does two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."Then the interviewer calls in the economist and poses the same question "What does two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?

Im wondering whether external devaluation, if inducing significant price rises of imported goods, can actually constitute inflation while under a appropriately weighty trade deficit? And if such price rises could legitimately be called an effect of devaluative inflation, relatively, then how could these movements perpetuate or translate into inflationary forces internally, would these not sooner induce further deflation when purchasing power cannot increase?

When there's no more room under tarp, the insolvent will walk the earth.

I know, I know, ultimately the taxpayer eats the loss, but I'm just trying to determine who should be most directly impacted by the suspension.

Shouldn't the holders of residential-mortgage-backed-securities (RMBS) be most directly impacted by this suspension?

If I understand RMBS correctly, the interest income stream for these securities is derived from the pooled interest and principal payments of the thousands of individual homeowners whose blended mortagage paper makes-up the RMBS. In addition, RMBS principal and interest income is derived from the sale of the properties. If homeowners default on their mortgages, and the mortgage servicers aren't able to sell the foreclosed homes, then aren't the RMBS severly impacted by the loss of income stream? How do the entities holding RMBS get their interest payments under those circumstances?

Here is an even bigger question:

How have the entities holding RMBS been receiving their interest payments at all? The housing and foreclosure crisis is over 2 years old at this point. Shouldn't the income stream for many RMBS already be dry due to the millions of homeowners who've stopped making payments? Who is supplying the income to make up for the millions of mortgage defaults?

Does anybody have an answer to this very basic and fundamental issue? The entities holding the $trillions of RMBS include: Fannie and Freddie, Pension funds, insurance companies, banks, and sovereign wealth funds. Has the income stream for many RMBS already dried-up and we simply don't hear about it due the lack of transparency with regard to these institutions balance sheets?

"There are multiple problems here. First is that there exists entities, like the Federal Reserve, whose primary goal is to keep the system afloat at almost any cost."

I found your qualifier "almost" interesting. What options could you imagine that the Fed wouldn't use to keep the system afloat? The reason that many predictions made here are postponed is that we didn't imagine that the Fed "would actually go that far and do that" :-(

It's funny, that after every economic crisis in the last few hundred years, and probably longer if you did the research, vast populations of "zombie" somethings were created, and people saw it happen and hoped they would all come back to life...

They didn't of course, because as I see it, they didn't apply my Type 1 A++ Super Replenishment Elixir, and by doing so, call for a Presidential Order to reset the value of the playing pieces in the game to correct the course of radically diverging values, off on which they had so visibly sailed. (www.synapse9.com/issues/reset$.htm)

The tragedy of the bubble, of course, is that the banks all still dearly desire to have home owners pay back three times the values of their homes, now in a depressed economy. What sense does that make?? No one should be paying anything but their ~1980 market level value of their homes (given that's about when I think the market began systematically diverging from reality).

To me the only thing radical about that is being practical and realistic about the problem.

It's funny, that after every economic crisis in the last few hundred years, and probably longer if you did the research, vast populations of "zombie" somethings were created, and people saw it happen and hoped they would all come back to life...

They didn't of course, because as I see it, they didn't apply my Type 1 A++ Super Replenishment Elixir, and by doing so, call for a Presidential Order to reset the value of the playing pieces in the game to correct the course of radically diverging values, off on which they had so visibly sailed. (www.synapse9.com/issues/reset$.htm)

The tragedy of the bubble, of course, is that the banks all still dearly desire to have home owners pay back three times the values of their homes, now in a depressed economy. What sense does that make?? No one should be paying anything but their ~1980 market level value of their homes (given that's about when I think the market began systematically diverging from reality).

To me the only thing radical about that is being practical and realistic about the problem.

"We should see a whole constellation of trends reverse at about the same time, because they all depend on the ebb and flow of liquidity in the market, which is determined by the ebb and flow of confidence. "

The most important source of liquidity in the market is the Feds open market operations. The Fed announced today $30 billion between 10/15 and 11/15 with their purchase of Treasuries to replace redeemed MBS. If they are crazy enough to do QEII with $10 or $25 billion more a week there would have to be some sort of dislocation of the well worn market mechanisms to see stocks or any asset class drop.

"Depositions released yesterday alleged that lenders hired hair stylists, Wal-Mart workers and assembly-line types, dubbed them experts and set them loose. Some did not know the meaning of "affidavit," according to the accusations. Thus the nickname "robo signers." !!!

Apparently it was not called a mortgage bubble for nothing. Egad! Shades of Douglas Adams!

* The sky isn't falling! The sky isn't falling; Anti-doomers are right; The bubble just has a slow leak and will never pop; As needed the Fed will back mortgages, 401Ks and cosmetic surgeries in perpetuity; They will prop up the markets until the universe collapses back in on itself

* People are selfish, stupid, cruel and blood thirsty; Glenn Beck is now talking about peak oil while NPR is clueless

* The economy is a slow motion train wreck; Watching the passengers is more interesting than watching the train; Watching oneself is too scary

* Property bubble made the middle class think they were getting richer; Most think the forces of history will only affect other people; People will never figure out what hit 'em

* Expensive things purchased with loose credit lose their value; This includes cars, homes, college educations and democracy

* College graduates can't get jobs; Anything that can be shipped by container or transferred by packet is being outsourced; Non-productive academia-driven career opportunities are toast

* When paying the mortgage can be ignored only the ignorant will pay the mortgage

* Questions of the day:- How about those markets?- How long can Wile E. Coyote levitate?- What about us?- Is anyone surprised people are selfish and stupid?- Can we agree on that?- What is the blogosphere coming to?- Who can you believe?- Is optimism justified?- What would Stoneleigh recommend?- Once the system is dead who will evict and collect?- Explanations?

* Hitler video subtitling has been done before; 1980s were the good old days; Sardines are for trading, not for eating

* Markets are blowing off the top; Trends are like a school of fish, they all change direction at the same time; Watch this space

Ventriloquist (on college education value): I've had to grapple with that myself. But after thinking and reading more about it, I'm still paying for my son's degree.

First, you are wildly off on college grad's debt. The most recent figures seem to be for 2008, it averages $24,000. Yes, that is a lot of money.

But I've come around to thinking it is still valuable when I see the unemployment by education graphs at Calculated Risk. For people (25 & older) with a bachelors, unemployment is only 5%. Maybe they don't have a great job, but they are employed. UE is 10% and 15% for people with no degree, or not completed high school.

Perhaps you will just say I'm biased, since I work at a university (on staff). My department is mostly a graduate program for HR people, I thought things would get bad when the economy tanked. But we've still been able to place 90%+ of grads into jobs in the field. And they make good money, maybe avg $75,000.

I agree with you that there are lots of jobs that require a degree for no good reason. And many people will hire a grad before someone without a degree. But I can't really change that, so maybe the degree is a plus.

I noticed you said a week or so ago that after ASPO-USA you would be off to Brussels to present at a biodeversity conference. As a UK academic in this field, I wondered what your views were on the future of conservation organisations in developed countries. As most depend largely or entirely on government funding and generally get a low priority even in times of economic plenty, my own feeling was that the future for this area is dismal. What advise do I give students who are looking to go into careers in this area - forget about it?

In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in "foreclosure expert" jobs with no formal training, a Florida lawyer says.

In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn't define the word "affidavit." Others didn't know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers' accusations about document fraud.

Yes, banks and mortgage companies hired hair stylists, etc., to vet foreclosures. They also hired them to process the loan applications.

Loan processors included ACORN and other "social justice" groups, the groups that worked with Congress to develop the legislation that would promote "affordable housing" and "home ownership" via "community reinvestment." They got into the mortgage processing business, making big profits.

I've recently been amusing myself by responding to everyone who asks me "Do you have any questions?" - which means doctors, nurses, dentists, mechanics, etc; with "Yes, I do. What IS the meaning of life?"

Their responses are great fun, once they get past being derailed. Particularly since I am now able to end the conversation with THE ANSWER.

I have The Answer. I found it on TV.

On my recent trip I inevitably wound up in a Super 8 motel, and inevitably was half watching an inevitable anonymous old movie. All I recall is that Gerard Depardieu was playing the role of a chef, who was currently the buddy of the protagonist, played by Queen Latifa. Since she was feeling down, he put his arm around her shoulder and said (approximately) "I'm going to tell you the Secret of Life." The Queen is intrigued, but not entirely buying this. "Oh, yes?"

"Yes. ... Butter."

And there it is. I'm going to use that answer from now on, and wanted to share this blindingly brilliant and completely accurate answer with the community.

justjohn, I didn't see the graph, but people over 25 probably graduated three years ago and got their foot in the door before all hell broke loose, didn't they? I'm more concerned about those that graduated in the last two years.

My kids are 8 and 10, so I have time to see what develops in the next five years. But I'm not too hopeful. I will be making sure they learn useful skills outside of school.

Whzzamatter ilargi, ox gore questions get your goat? But no time for idle chit chat, gotta run and stock up on popcorn for tonight as we just bearded paypal and ordered Stoners's Magnus Opus. BTW remember just another aprox 9 orders and you can make the purchase of a 1/10th oz Can. gold Maple Leaf a possibility. Of course prices do change for the up as well I guess as the down. Say, just a thought, but sometime a talk about how gold performs in deflation as well as inflation could be informative. Like if I thought we were going to ever hit 'normal' times in my lifetime I would be selling gold hand over fist. (Goodness, have you ever wondered where the expression, hand over fist , came from? I just did and , thanks to the marvel of the internet , found this which, with minimum stretching of ones imagination, makes that which we might call a smidgen of sense):

"The term is now used to suggest speed and profusion, especially in financial dealing, e.g. 'making money, hand over fist'. In the 18th century 'hand over hand' and the later 'hand over fist' had a different meaning though and meant 'making steady progress'. 'Hand over fist' is a little more descriptive of hauling on a rope than 'hand over hand', after all, when we grab on a rope to pull it we do make a fist and then reach forward with our other open hand. This term makes an appearance in William Glascock's The naval sketchbook, 1825 "

Why should anyone need a college degree to get a job? Professional schools and vocational schools prepare people for jobs. People go to college or just study books to get an education which is an intrinsic good. Keep thinking that.

Also, I can't help but think of Michael Ruppert's 100th monkey in "Collapse." Not everyone has to get convinced by Stoneleigh - only the 100th monkey. All of those NPR stations have community boards or councils. In New York Station AMC has Alan Chartok who could be reached.

There is way way too much Schadenfreude among us 99 aware monkeys. Instead we should rejoice that TPTB are holding things together. That means there is some time left for people to start preparing. The government will never never lead us because real change does not come from the top down.

Get busy with your NPR stations and get the word out. I think Stoneleigh's presentation will get some of them.

First, thank you for the fine programs presented on WBST!I wish to suggest that your program director(s) consider running an interview with Nicole Foss, one of the co-authors of the blog The Automatic Earth. Her TAE blog identity is Stoneleigh.See her extensive qualifications and bio here... http://www.aspousa.org/worldoil2010/speakers.cfm?bid=1056

Here is a link to a video of her presentation released during her recent worldwide speaking tour.http://www.postpeakeducation.com/Nicole-Foss/A-Century-Of-Challenges/index.cfm

In these trying economic ,times Ms. Foss, with her engaging manner, and her wealth of experience in energy, infrastructure, and economics would make a terrific program interview subject, not only locally but to a nationwide audience as well.

The Fed could purchase private, non GSE, MBS to the tune of 1.5 or 2 trillion. With the understanding they will not sue the originators or servicers for anything ever. Presto, the TBTF banks problem just shrunk enormously. In 5 years the Fed starts recognizing the losses on their balance sheet. Who cares?

The reason that many predictions made here are postponed is that we didn't imagine that the Fed "would actually go that far and do that" :-(

Actually, Mr. Vulture, I think that in the months and years ahead of us, we ill begin to see many, many things this government will do that will go far and beyond what we all have grown up to believe they would dare to do.

In fact, the elites of an empire as large, wealthy, and powerful as the USA, will go to any and all extremes necessary to maintain their elite status to the bitter end.

This is why I am slowly coming to believe that what many people here and on other similar sites have been espousing as far as collapse mechanisms and co-incident time-lines are unfortunately erroneous.

There have been predictions made based upon "What Surely Must Come To Pass Based On The Usual Unstoppable Forces." However, these forces -- human psychology, markets, herd behavior, historical patterns, etc. -- can be bent, misdirected, parried, blocked, and evaded, for what may come to be a very long time indeed.

Be forewarned that the elites have significant powers that they have not even yet begun to reveal, and that, especially in America -- a quiescent. apathetic, demoralized, and stupefied public will offer them very little in the way of real opposition.

Your suggestion would cause long term interest rates to spike and thereby precipitate an immediate full stop deflationary collapse due to unserviceable debt loads. Long term interest rates remain low because the FED has not yet attempted to truly debase the dollar. The dollar has value because the assets of the FED balance sheet come with a requirement for the taxpayer to pay-up for any losses (Treasuries, Agency Debt, Fannie/Freddie guaranteed MBS). If the FED were to pollute its balance sheet with private debt that the taxpayer doesn't guarantee (your suggestion), that action would cause a spike in long term interest rates as Treasury debt-holders demand an interest rate premium for a currency that will be debased as the FED prints to plug the hole in its balance sheet. The FED would be forced to print because worthless MBS with no taxpayer guarantee would require printing to plug the balance sheet hole.

Vrabel described it as power Machiavelli never dreamed of. Mike Whitney has dug up some tidbits from an old Bernanke speach to a Japanese audience. If Big Ben does try to pull this off, Bernanke Ponders the "Nuclear" Option we shall indeed be on the edge of a precipice.

Interesting Max Kaiser interview with Eric Jantzen (iTuliip), not to knock what Mr. Jantzen says, but, if one adds, at the very end of the interview, the question: " ...and how is that to be done with a soon diminishing oll supply? ", one might be inclined to say, "Oh fuddle!".